One Way to Hedge Falling Stock Prices

By Adam O'Dell  |  January 31, 2020

Stocks are trading lower on growing fears of a global health crisis begun by the coronavirus outbreak in China.

And while I doubt this one piece of news will be enough to make or break the current bull market, it does give us a good opportunity to talk about hedges.

Of the 20 investment vehicles I recommended in my 20 Trade Ideas for 2020 and Beyond series, five of them can be categorized as hedges. That means, they promise to offer some level of protection during periods in which stock prices are struggling — be it a pullback, a bear market, or an outright global financial meltdown!

There are different ways to hedge a long-stock portfolio. You can implement either a strategic hedge (something you own all the time) or a tactical hedge (something you only move into when it seems warranted). And we’ll talk about both types in the weeks ahead, as I’m a proponent of using both.

The hedging vehicle I’m highlighting today is a tactical trade. It’s not something you want to buy and hold. Let me repeat that: you should not buy and hold this vehicle.

In fact, I’ve instructed my 10X Profits subscribers not to buy this hedge just yet.

But when the right time comes, I want you to be prepared to make a tactical trade on this high-octane hedge.

Market Timing

People say you can’t “time the market.”

And it is difficult knowing exactly when a downturn will come — particularly these days!

But while you’ll never catch every little twist and turn perfectly, a proven systematic market-timing strategy can help you stay invested during the meat of a major bull market rally, and get your positioned properly for the worst of a bear market crash.

That’s where a market-timing approach can really shine.

Most folks are in duck-and-cover mode during recessions, bear markets and panic-driven crashes. Their only goal is to make it out alive.

The so-called “60/40” portfolio (60% stocks, 40% bonds) is Wall Street’s best solution for riding out the storms. And it’s not a good one, since the always-on allocation to bonds is a real drag on returns in the long run.

I’ve already shared before in The Rich Investor how my systematic market-timing model has easily outperformed the passive 60/40 portfolio over the past 12 years — simply by investing in stocks when my model says “all is well,” and only switching into bonds when there are signs of trouble ahead.

A market-timing approach to the 60/40 beat passive 60/40 by 2.5-times, generating 13.1% annual returns versus 5.3%.

But no one says you have to use bonds as your “safe” asset during times of trouble.

My 10X Profits subscribers know of a far better option…

That is… volatility.

Using Volatility to Your Advantage

The Volatility Index (aka “The VIX”) is the ultimate fear indicator.

No matter what the cause is… when folks are scared, the VIX shoots higher. Sometimes, astronomically higher.

That makes it an ideal tactical hedge.

With the innovation in exchange-traded products over the last decade, buying a long-volatility hedge is now accessible to everyday folks like you and me. It’s as simple as buying any ordinary stock or ETF.

One long-volatility vehicle in particular, the iPath Series B S&P 500 VIX (NYSE: VXX), takes center stage in my 100 Paths to 10X Profits report, which you can get complimentary with a subscription to my 10X Profits service.

VXX is our “risk-off” position. We buy shares of VXX when my systematic market-timing model signals “trouble ahead.”

And that’s because when things get dicey in the stock market, VXX can generate eye-popping returnsmore than bonds, the U.S. dollar, the Japanese yen, or any other “safe-haven” asset you can think of.

Consider how well that could have worked for you in 2008…

We all know the top of the last bull market came in October 2007. But panic didn’t truly set in until the last several months of 2008 and my market-timing model called it perfectly.

On September 29, 2008, my model flashed its “trouble ahead” signal and recommended a long-volatility trade.

That trade turned out to be “The Big One,” as I like to call it.

My market-timing model called for staying long volatility between September 29 and December 11, 2008.

During that time, the S&P 500 fell a sharp 21%!

U.S. Treasury bonds provided some relief, with shares of TLT gaining a nice 18%, nearly a full hedge to the losses that stocks were suffering.

But volatility did far better. Not only hedging stock’s losses, but also generating massive gains.

All told, volatility gained a whopping 185% between September 29 and December 11, 2008 — the time span that my market-timing model recommended holding the position.

So compared to bonds, volatility provided 10-times (“10X”) more protection!

That meant that while most traditional investors were merely trying to survive — even the conservative ones, who dutifully held a diversified 60/40 portfolio — my systematic market-timing strategy could have helped you nearly triple your money during this brief window of opportunity.

That’s something buy-and-hold will never do for you…

Something a passive 60/40 portfolio won’t do for you…

And something — I’m sorry to say — you probably couldn’t do on your own, if you’re merely trying to “time the market” based on subjective judgments, “gut feel” or whatever CNBC is squawking about at the time.

Successful Investing with a Systematic Approach

As I’ve said from the beginning, a systematic approach to market-timing is the only approach to market-timing I’ve ever seen work.

It’s the approach Boston Red Sox owner John Henry used to amass a $2.7 billion fortune, despite Wall Street and academia’s claim that it’s “impossible to time the market.”

And it’s the approach we take in my 10X Profits research service, where I offer live market-timing signals — telling you exactly when to be positioned bullishly and when to be positioned bearishly.

The signals I share are crystal clear. There are only two of them: “risk-on” and “risk-off.”

Some of my 10X Profits readers use my market-timing model to implement a more responsive, tactical approach to the classic “60/40” portfolio — buying a stock fund during the good times, or a bond fund when my model signals “trouble ahead.”

Some 10X readers opt instead for the super-charged “long-stock” or “long-volatility” implementation, which I’ve shown capable of producing 50% annual returns over the last full market cycle.

The options are many, and I’ve detailed more than 100 market-beating portfolios in my 100 Paths to 10X Profits report, which in a way has become the “bible” of my 10X Profits research service.

I really hope you’ll give market-timing a chance.

There’s never been a better time considering the market’s recent volatility and the chance that we’re finding ourselves on the knife edge between “bull” and “bear” territory.

To gain access to my model’s next signal — which will tell you exactly when to get into VXX, down to the day — click here.

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Adam O'Dell

As Chief Investment Strategist for Dent Research, Adam O’Dell has one purpose in mind: to find and bring to subscribers investment opportunities that return the maximum profit with minimum risk. He achieves this with his perfect blend of technical and fundamental analysis.

Tactically, he does extensive back-testing and probability-based research. It’s the ultimate partner to the exhaustive research that Dent Research co-founders Harry Dent and Rodney Johnson do in the exciting realm of the new science of investing.

Adam is also the executive editor of our hugely successful trading services, Rich Investors Club, Cycle 9 Alert and 10X Profits.

He has worked as a Prop Trader for a spot Forex firm. While there, he learned the fundamentals of trading in the world’s largest market. He excelled at trading the volatile currency markets by seeking out low-risk entry points for trades with high-profit potential.

Aiming to find the best opportunities across all asset classes, Adam expanded into the commodities, equities and futures markets. An MBA graduate and Affiliate Member of the Market Technicians Association, Adam is a lifelong student of the markets. MORE FROM AUTHOR