The Stock Market's Downside: 2 Ways Speculators Can Be Rewarded
Plus: a perspective on selling stocks short
by Bob Stokes
Updated: May 14, 2020
When prices fall hard in the stock market, a speculator who holds a short position is obviously on the right side of the trend.
Yet, if that stock decline happens during a deflationary economic crash, a successful trade is not the only way a market participant comes out ahead.
Here's what the 2020 edition of Robert Prechter's Conquer the Crash says:
The opportunity to make money on the downside in a deflationary crash can hardly be overstated, because you will be making more dollars as the value of dollars is soaring. It's a double benefit.
Some have argued that it's wrong to bet against the market. For example, when prices were in free-fall in September 2008, the government actually imposed a temporary ban on short selling.
Yet, you might be surprised to learn who is largely driving the market down when fear is in control. Here's another excerpt from the 2020 edition of Conquer the Crash:
In a bear market, bullish investors always come to believe that short sellers are "driving the market down," when in fact the decline is almost entirely due to selling from within their own overinvested ranks. Sometimes authorities outlaw selling stocks short. In doing so, they remove the one class of investors that must buy.
All investors who try to speculate on a downturn must be aware of two facts: 1) Some brokerage firms may not survive a deflationary depression, and 2) A short position comes with considerable risk.
Yet for traders who can manage that risk, the opportunity may be real indeed -- at the right time.
Are we approaching that time?
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Does "Diversification" Really Protect Your Portfolio?
Many financial advisors say diversifying your assets is a good strategy for portfolio protection.
Yet, the 2020 edition of Robert Prechter’s Conquer the Crash provides this perspective:
Countless advisors have counseled “diversification,” a “balanced portfolio” and other end-all solutions to the problem of allocating your investments. These approaches are delusional. … No investment strategy will provide stability forever. You will have to be nimble enough to see major trends coming and make changes accordingly. …
When deflation looms, almost every investment category becomes associated with immense risks. [emphasis added]
The just-published May Elliott Wave Theorist discusses the stock market’s “major trend” so you can prepare for what’s next.
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