Market Crashes and How to Profit from Them

Welcome to Market Crashes. How to identify, protect and ultimately profit. My name is Robb Reinhold. If you don’t know who I am, it’s not surprising you shouldn’t know who I am unless you’re one of our traders. But if you’re just joining us for the first time, my name is again Robb Reinhold. I’m the head trader here Maverick Trading. I’ve been with Maverick Trading all the way since 1998. I was one of their first traders to walk in the door when they were a brand new shop, and I’ve been at this business now for about 21 years. I have definitely seen some market cycles during that time. I’ve traded through the dotcom crash, traded through the Great Recession, and I’ve got to say that’s what we’re going to talk about tonight. We’re going to talk about all those cycles that happen in the market; number one, how to identify when they’re going to happen. Two, how to protect yourself and three, ultimately, let’s make some money doing it.

Right now, I’m going to be going through a lot of material tonight. When I looked at the slides I had prepared, I thought, Okay, this is going to be a lot of material. I’m going to go through quite a bit today. We’re going to look and analyze the market, how it is today. That being said, the real purpose of this session is to at least educate you on what you should be looking for, what are some of the things you should look for and then ultimately, what are the things that you can do. With the hour that we have together, not going to be a ton of time for really me to get into any great detail on strategies, but what I want you to at least start to think about and to learn is, how do I identify things? And how do I protect myself? And how do I make money from it? Let’s go ahead and get started as I said, we have a lot to cover.

Now most of the things that I’m going to be going over, I simply pulled from our education series. At Maverick Trading, we put all of our trainee traders through what’s called a qualification program and basically we talk about all the things you need to know as professional trader. That’s really the difference between the amateur trader who goes out, opens up a TD account, put some money in, click some buttons, and read some books. Then there’s professional traders that this is literally their job. This is what they do for a living, and it’s really all a matter of how much they know, and how much experience you have. I’ve taken a lot of this straight out of our materials and this is in one of our sessions called Market Foundations. It’s called Economic in Business and Market Cycles.

I love this quote, “History repeats itself but in such cunning disguise that we never detect the resemblance until the damage is done.” I think that he wrote this exactly for the stock market. Because anytime you hear the words in the stock market, this time it’s different. Those are the most frightening words that you will ever hear from anyone in the stock market, is this time is different. Yes, every time it looks like it’s different but in the end, look it’s the same thing we see all the time. It’s a business cycle. It’s a cycle. Now again I’m not going to get into the boring economics of this. If you took economics again, even high school, this is high school level economics. You know that there’s phases to an economy cycle. There’s the recovery phase, where things start to slow, they start to heat up. There’s the early upswing phase, is where people are starting to get a little bit more confidence. Inflation is low, bond rates are low, bonds are stable, the stock market, strong commodities are strong, property prices picking up. Boy that sounded like 2011 to 2015.

Then you get into the late stages of a boom market, you get what is called the boom mentality. This is where people are jumping in, because they’re now scared of missing out. Back in the upswing phase, people found lots of reasons not to buy stocks. Over here, people are, “Oh my gosh, how can I do it? I got to get on this.” Inflation gradually picks up, “Oh boy, that’s happening.” Policy becomes restrictive, we’re on the way of getting there, we are getting … The FMOC raising rates. We have short bond rates rising, we have yields rising. Stock market topping out. We are going to be debating this one quite a bit. Commodities rising strongly, that actually is not happening all that much. Are property prices rising strongly? Yes, it is. The point I’m trying to make and I don’t want to get too far into this, but everyone knows that there’s economic cycles. Everyone. Everyone understands this, but I don’t understand why people are shocked when it actually happens. People think this time is different, we’re not going to have a recession.

Look, we’re going to have a recession. We’re going to have a recession somewhere in the next who knows, what we’re here tonight to discuss, but at some point there will be a recession. When that happens, we all know what happens. You get people losing their job, you get production falling, you get stock market crashing, you get real estate prices crashing. We know what happens in recession. We’ve seen it. Historians, have documented what happens but yet each time it seems like people are surprised and again, I want to go back to this quote. This quote is perfect for this, “History repeats itself but in such a cunning disguise that we never detect the resemblance.” This is exactly how it works.

Let’s all just start off with realizing, hey, there is going to be economic cycles. Now, I don’t want to get too far off in this subject, because, boy, I can rant and rave on the Fed, like the best of them. I love ranting and raving about the Fed. I’m going to try to keep it short, but the reason the Federal Reserve was created is trying to make the economic cycles not so large. Go from boom to bust. Boy, how well have they done? Not that well. It’s because the economic cycle, is a guarantee, you cannot avoid it and if you try to prolong it, you probably end up making the next crash even worse. Again, let’s all agree that economic cycles are reality, there’s nothing the Fed can do, there’s nothing the President can do, there’s nothing anyone can do to actually change this. It just happens.

During the last, let’s say, 70 years, we’ve seen that we have economic expansion. We’re in the longest economic expansion right now in post industrial history. This is the best one that we’re in right here, right now. Let’s talk about recessions. We know there’s going to be recessions it’s part of the business cycle. We know it. We accept. There’s been 12 recessions in the last roughly 70 years. The shortest one was nine months. The longest one, was a period of three years and the deepest one was in 2008 where we got absolutely crushed. Again, in the last 70 years, there’s been 12 recessions. Do the quick math, that’s about once every six years there’s been a recession. When we take a look at a long term chart of the market, you can see that there are periods where the market goes nowhere for a long period of time. Again, this is from 1967 to 1980, that’s 13 years of nothing. If you were an investor, a buy and hold investor there you got nothing. Now we got a huge economic expansion and then in 1987 we got that really nasty black … Was it black Tuesday? Black Friday? I can’t remember. It was black, that’s all I know.

But again we got a nice 25% fall in the markets it recovered and then we had a big expansion in the ’90s and then here we are, same thing. We had roughly 14 years of stagnation and then we’ve broken out and run from there. Again as you can see, this is how it works. This is how it works and again nothing will ever change this, not the Fed, not monetary policy, this is human nature. This is what we do. I wanted to get that out of the way because this is where it doesn’t make sense to be a permeable. Now a permeable … And boy, I sometimes, I cannot stand CNBC. I watch CNBC all day long and look, I actually don’t watch it or I don’t listen to it. It is now white noise in the back of my mind. But I always see people that come on to say, “Oh, you know what, we’re very bearish. We’re sorry we’re very bullish.” And they say, “Well look you’ve been bullish, and the market is down 30% over the last two years. You’ve been bullish all the time.” Like yes that is true.

Well then, why should we listen to that person. It makes no sense at all to be a Permabear. Now Yes, I get that stocks do rise over time and that is a fact. Due to population growth and inflation as long as there’s population growth in the future, we’re likely to continue to have a rising stock market. It’s just effect. Again, but we all know there is market corrections recessions in there, it doesn’t make sense to be always bullish. Now it really doesn’t make sense to be a Permabear. Now I have to fully admit. There was about two years of my life that I was a Permabear. It was right after the big crash in 2000. I made a ton of money shorting technology stocks and dotcom stocks in 2000 and 2001 it was down.

Then when the market turned around, I stayed bearish because I had just seen what happens when things get really ugly and I was scared. I was always scared to go long, and so I became a Permabear. Really quickly, raise your hand if you found yourself either right now or in the past being a Permabear? Where every bull market you doubted it. You said, “This one’s too high, this one’s a piece of garbage, this one there’s something wrong with it. Once you actually get educated, it’s a very normal natural thing ’cause you see how fragile the system can be. Listen, it doesn’t make sense to be a Permabull, it doesn’t make sense to be Permabear. It makes sense to be an analyst, to actually look and see.

What I want to get into is that, we all understand that stocks do go up over time due to inflation and population growth and innovation. We’ll throw in innovation too. We also have admitted that during that uptrend, there’s going to be corrections that are greater than 10% and then periodically there’s going to be bear markets. They go down 20%, but over time, stocks do generally tend to go up, that’s the premise we’re all starting at. I don’t think I’m saying anything that anyone can argue with, this is the way it works. Let’s talk about these corrections. Markets can have a pullback. Now pullback is anything that is less than 10%. I know it’s a little silly because we’ve had the S&P pullback 9.7%, and we can’t technically call it correction because it hasn’t been over 10. I know it’s silly but look, we as human beings, we got to classify things. There’s pullbacks, all the time stocks. This happens all the time, pullback 3%, pullback 4%, pullback seven. Those are simply just pull backs. Then we have corrections, which is 10% or more and again, actually 10% to 20%. 20% is called a bear market.

We have these periodically and they happen, and what happens is people usually get pretty panicky, they get freaked out and they sell and then it bottoms out, and then it comes back. I just want to go through the terminology what we’re going to be talking about here because the question is, how do you know when it’s a correction? How do you know when it’s a bear market? And how do you know when it’s a market crash? Those are the two things or the three things we’re going to be looking at. Let’s talk about corrections. If you take a look at the numbers at the statistics. The market declines 5% or more roughly three times a year, that’s the average frequency. The average length is 47 days so that’s a month and a half. As you can see, that’s a pretty big deal. 10% more crashing, typically once a year. Typically once a year, you can see lasts about three to four months. A decline of 15% or more, usually once every two years and a bear market 20% or more, usually once every three and a half years.

You can see these are the stats, these are the numbers. If you are involved in the market as a trader or an investor, you just need to count on these things happening. This is statistics, it’s statistics. This is what’s going to happen. It always blows me away that people are surprised. The market goes up for four months in a row and then it has a 7% pullback and everyone is like, “What! Oh my gosh! What happened? Are you kidding me?” Wait a second. How were you surprised? This is literally the way it works. I don’t understand how people are surprised, this is how it works. You usually get at least one correction a year, you usually get a couple of pretty deep pullbacks, that is just the way the market works. It blows me way that people, are number one surprised that it happens and number two, people will wreck their accounts when these happen because they’re like, “I didn’t even see it coming.” Come on, that is dumb. That just means that you don’t know enough. You haven’t been involved enough. These things happen, they happen very quickly.

Let’s talk about the difference between corrections and crashes. Corrections happen often, and they happen in a strong economic environment. Let’s say that again. Corrections happen in a strong economic environment. The one thing I’ve learned and this is the one thing I’ve been telling our traders for about the last six or seven years and we meet every single Sunday, we talked about the market, and I swear that pretty much every Sunday in the past six or seven years I’ve said this. I have learned in my career of trading that when the economy is strong, stocks go up. Yes we have corrections, yes we have pullbacks but overall stocks go higher and it pays to be more long than short. Crashes happen in economic downturns. As you can see correction is simply just a price correction in the stock market.

A crash is when there is a turn in the economy. Again it rarely breaks long term support, you can see they generally are seen in strong uptrend in markets. Corrections usually happen in strong uptrendy markets and usually happen after a big run. If we go back to January 2018, the stock market went up 8% the first two and a half weeks of the year. Isn’t that crazy when the markets almost average 8% a year, and it did in the first two and a half weeks? What happened after that, 10% correction, that’s what happens. One of these is just temporary, is simply price correction in the stock market and the other is when things have changed, when the economy has changed, when growth has gone from positive down to negative, or there’s some serious structural problems. Corrections, when you look at all the numbers, you simply look and say, “Okay, what’s your economy doing? What is the future? What’s showing me?” It’s going to tell you “It’s going to give you a rough idea.” Is this more of a correction?

Anything over the last couple years, has definitely been a correction. We’ve had very strong economic data, we’ve had no slow down, I think again, it’s been very good to be mostly bullish over the last couple years. One thing we’re going to talk about is a market bubble. Now market bubbles are very, very important to recognize because this is where crashes happen. Look, we have economic cycles when we have a normal recession. Yeah, the stock market goes down. Yeah, we get it but it doesn’t crash. Market crash after market bubbles. There we go, there’s really again hopefully everyone understands corrections. These are corrections. They happen within bull markets, they can be 10% or greater but in the end the underlying premise behind stocks is a strong market. These corrections are usually short and actually go back to new highs.

Let’s talk about bear markets. The qualification of a bear market is a 20% decline, that’s a bear market. According to the Ned Davis Research in the last 120 years there have been 126 corrections and 32 bear markets. They average once every 3.6 years. This is going to be so annoying when we have our next bear market. We’re way overdue for a bear market. We haven’t had a bear market in close to 10 and a half years. Here we are at 3.6 and when it happens, do you realize that people are going to be surprised. It’s absolutely bonkers, that people are going to be surprised and then there are people that are going to lose their whole accounts, because they’ve over leveraged themselves,, and they don’t even understand it. This is how the market works. Just count on, you’re going to have a couple of bear markets in your lifetime. You’re going to have probably seven or eight bear markets in your lifetime.

Boy, I just really chopped off some of your lifespan if you only have eight in your lifetime. That means, boy, you better have everything done by the age of 40. But anyway, and then you’re going to have a couple severe crashes in your lifetime. Again that is how it’s going to work. The big question is, how long do they last? What happens? In the average correction, the market fully recovered its value with an average of 10 months. In a correction, it typically takes 10 months to get back to where you are. In the month of October of 2018, the month of October completely wiped out all equity gains for the entire year, that’s why these things are really nasty. What took people nine months to make, was erased in a matter of about 20 trading days. They’re brutal. What I’m saying is this is going to take about an average of 10 months to get back to where we were to make new highs.

If your take a look at October 2018, I think if you’re bullish and you think that the economic cycle is going to continue, I think you’re looking at next spring the earliest, that you’re going to see in your all time highs. Now the average bear market last for 15 months, and the average decline is 34% in the S&P 500 so again that’s a third of the value, that’s the average bear market. Now we have the crashes, which is the last one we got from 2007, 2009. It took 54% off of the Dow Jones, so as you can see these things are normal they happen. We’ve talked about the duration, expected correction about three corrections are again three 5% pullbacks a year expect one correction a year in expect one bear market every 3.6 years and during that bear market is going to lose 34% of its value on average and take 15 months to recover.

Alright now look, this is how the market works. These are the numbers. Again it blows me away that people are going to get into trading and they’re surprised when these things happen. They’re surprised and they’re like, “Oh I thought we were years away from that.” No, you have to be conscious of the numbers. These are the facts. Let’s talk about the markets ’cause here we’re going to start to look into analyzing where we are, because there is a economic cycle and there is a market cycle. Now, hopefully you’ve all heard that the stock market is what’s called a discounting mechanism. They say that because, the stock market is supposed to predict what is likely to happen six to nine months down the road. The red line is the market cycle, the green line is the economics cycle.

You can see here, that the market tops out before the economy does and that’s almost always what happens. The stock market starts to go down before the economy starts to go down. You’re going to see the market go down before you see the economic numbers. Now I really really love this slide because it shows you what are strong during these moments. Let’s take a look at the stock market right now. It’s down about 8% from its all time high. If we are around the market top and the economy is about to turn over, we should see this biggest strength in consumer staples, healthcare and utilities. Well, has anybody noticed over the past month, what have been the strongest sectors? You’re right. The strongest sectors have been staples, healthcare and utility by far. What have been the weakest? Well, that’s been technology, cyclicals and industrials. These are the ones that are the weakest during those points. I don’t want to jump too far into conclusion here but based on the economic cycles and the business cycle, we are seeing what’s called late cycle activity.

It means that, these are the things that happened late in the economic cycle. You get strengthen consumer staples, strengthen healthcare, you strengthen utilities, energy was the strongest at the market. Now it should be plunging and sure enough it is. We had oil plunge 8% today. A lot of the things that this graph shows are happening right here, we are in the late stages of an economic expansion. I don’t want to jump too far ’cause this is what we’re going to do. We’re going to identify where we’re on the cycle. This is the hardest part of the process and I know everyone loves to try to pick tops and bottoms. Go ahead and give that up. If you ever get a top or bottom, you were simply lucky and if you’re trying to pick tops and bottoms, you’re going to get slaughtered, because you’re going to be wrong for a long time, so do not try to pick tops and bottoms.

What you’re really trying to do, is get the big picture. Get the big picture and we want to really look at sector performance, evaluations and everything to get a good idea of where we are. Let’s start that process. Let’s go into start looking at where we are in the market and the last thing I want to cover is market bubbles. Market bubbles. Now again, this is common knowledge, but I want to just make sure everyone gets this. There’s markets they generally go up. During expansions, you have pullbacks. About three times a year you get corrections about once a year and every three and a half years you get a bear market that tumbles 34%. We get that. That’s normal. Everyone should know that going into this. Every so often we get a crash and we get a crash because things got crazy.

Characteristics of a bubble. First of all, no one believes there’s a bubble. Isn’t that the irony? I love to see people on CNBC talking about stuff like Netflix. I say, “You know what? No. Netflix is not in a bubble. It’s absolutely not in a bubble.” Look, Netflix is a fast growing company. It’s got good content. Oh, by the way, it’s losing millions and millions of dollars and it’s not really anywhere close to making a profit and the evaluations on it are sky high, but don’t worry, it’s not in a bubble. I know that some of you are going to debate me on whether or not Netflix is in a bubble or not. Look, the only way that will ever know is check back with me in a year. I will absolutely take my side of the bed.

Stocks like Tesla. People say, “What’s Tesla?” This is a risky proposition for me to attack Tesla. What? Robb come on Tesla is not a bubble stock, it’s absolutely not a bubble stop. I mean, yes, they’re not anywhere near profitability. Yes, they’re running out of cash, and they’ve had to go to the markets to get several cash raises but don’t worry, it’s not a bubble. Now I’m getting myself in some trouble, attacking some really, really loved stocks out here. But anyway, what it is, is the asset prices are substantially higher than their intrinsic value. We’re going to take a look at that word, intrinsic value, what it means and we’re going to start to take a look at all assets. If you take a look back in history, if you go back to the 2006, 2007 remember real estate was going up like 25%, 26% a year in some states. The long term average of real estate appreciation is right around 4%, and we had a couple years of 10%, 15% 20% appreciation of homes.

Do you know what people said, “Hey, don’t worry, it’s not a bubble. It’s not, just calm down. This is real estate is not a bubble.” Come on, that’s bubble mentality. When I hear people just tell me it’s not a bubble, the first thing I think of is holy crap. It’s a bubble. When we saw Bitcoin last year, and Bitcoin went crazy. All of a sudden everyone said, “Oh my gosh, I have to get into cryptocurrencies.” What happened? It burst. The bubble burst, Bitcoin went from 20,000 it’s sitting right now around 6000 and I’m sorry, if you’re holding it at 18,000. I’m going to bet against you again. I’m sorry that’s probably not going to come back. Oh, by the way, you don’t really even own anything that has any intrinsic value. We can’t even talk about intrinsic value of cryptos.

The other thing is velocity of money, meaning there’s lots of turnover, that’s what’s the velocity of money it is. It’s part of the inflation formula, velocity of money is. If you could follow a dollar bill around, how often is that dollar bill traded hands in a year? If you go back to 2010, people were not spending their dollars, the velocity of money was very slow sitting in bank accounts. Now we’re starting to get some activity seeing a lot more velocity of money.

Let’s talk about are we in a bubbles? This is what we’re going to look at. I want to take a look at some of the key things and again, we’re going to look at today, but my purpose is not to tell you whether or not we’re in a bubble today, because guess what? I don’t know. In the end, I can show you reports, I can show you these things nobody can call a bubble that’s the irony of the bubble. Look, you can call it but again, if you get it right, you’re lucky. One of my favorite sayings is that “Economists have predicted 73 of the last 12 recessions.” Hopefully that gave you a good laugh. Think about that.

They’ve predicted 73 of the last 12 recessions. They’ve been wrong all the time and every so often somebody gets it right, and that person gets trodden out on CNBC and well like, “Hold it, well guess what? You call it in 2014 and ’15 and ’16 and ’17 of all time you’re wrong.” Wow, I’m getting way off as you can see, I’ve got some pet peeves about CNBC. I might need to get some counseling on that. The purpose is not to tell you where we are now even though we’re going to go through that, but I really want you to start to do this on your own. To where you look at things and you say, “Okay where are we in the business cycle?” You’re not one of those people that I have been very mean to that are going to be surprised when it happens. What? I didn’t know. I couldn’t see it coming. Now I can know. Guess what? Yeah you can.

We’re going to go over contrarian indicators, margin/debt levels are always a big sign of whether or not we’re at a market top, market valuation levels also shows market tops. We’re going to go through intrinsic values and we’re going to talk about safe assets. Let’s take first look at contrarian indicators. This here is the Global Futures Dumb Money Indicator. Again, this is from a firm called Wall Street Courier. This is their own proprietary thing. Basically what they’re doing is they’re, following a lot of things that the dumb money does. And they call dumb money I mean the people that typically get in at the high end then they sell at the low. Most likely the retail trader. They’re going to take a look at stuff like odd lot sales. An odd lot is any trade that’s made, that is not in 100 shares increment. If you make a trade that was 154 shares, you are now recorded as an odd lot sale.

History has shown, that at market tops odd lot sales are almost always at highs. Why? Because it’s the little person getting it in because they’ve been sitting and waiting and waiting and they finally got that fear of missing out and they jumped in. If we take a look at this down here is the indicator and you can see, it’s about average here. It’s about average. This contrarian indicator is saying, “Okay well, we’re not seeing really reckless behavior, we’re not seeing everyone pour in.” Now look, we take a look back in a couple years ago. You can see that there is as much lower here. Right now we’re not seeing super reckless behavior as far as odd lot sales and little guy coming in. Next thing we want to look at is investor sentiment. History has shown that market tops are usually when investors are the most excited. Again, this is where people have waited, waited, waited and finally, it’s such a clear thing that they finally go in and put some money to work.

You can see here that extreme ratings are up around 60%. You can see the right now, we’re pretty much right in the middle here. Investor sentiment isn’t overly bullish right now. We aren’t getting that crazy behavior where people are so excited about the market. Even a couple months ago, we did not get extreme bullish readings on these indicators. This indicator here will tell you it’s about normal. It’s about average, we’re not seeing any over exuberance from investor sentiment, we’re not seeing any craziness in the odd lot sales.

Let’s look at next margin and debt levels. These are margin and debt levels. Now hopefully you can see just the trend here. You can see that when the markets really crumble, first of all, when the markets get really far away from the debt levels to the market level. You can see that there’s typically corrections after. However this entire expansion has been led with margin debt. But if you take a look at it as a percentage, we’re yes. We’re using more debt than the markets, that is overall bearish sentiment but it’s not a warning sign. It’s not really a warning sign. This is telling us okay, yes, margin levels are high, but they’re not sky high. We’re not seeing reckless behavior quite yet.

Next, let’s take a look at revolving credit. This is revolving credit of just regular consumers. Now the interesting thing is, we’ve actually gone above where we were in 2007. Now that being said, I hate charts like this, and I could not find one that was different because the economy is much bigger today than it was 10 years ago. Of course, I found this on a site I was like, “Oh, my gosh! Debt levels are higher than they were in 2007.” Well, I hope so. The economy’s about double the size probably where it wasn’t 2007. However, you can see the overall trend is rising debt. People are taking on more debt. This is one of the things that causes market crashes, when people have let’s say, you have your house and you’ve lived there for years and years and years and you’ve got a mortgage for 50% of the value.

When the real estate market tumbles, guess what? You’re comfortable, you’re not going to walk away from that house. You’re going to be okay because you’re not up into debt. It’s when the people took out a 0% loans or I mean zero down loans or even worse back in 2007, the high debt levels is a big warning sign. The debt levels in the market and the debt levels in the consumer, yes, they are high but they’re not sky high. They’re not bubble high.

Next let’s take a look at the P/E ratio. This is the 12-month P/E ratio looking back is 22.23. The average is 15.6. Again, the highest we got was in May of 2019. Again there were pretty much no earnings whatsoever and the lowest was back in 2017. As you can see we are elevated. If you take a look at the historical average, we are elevated a little bit, but we’re not above bubble levels. I remember back in 1999, we got up over the 40s on the P/E ratio. Then again, we all know that we saw a big crash in 2000, because we got over inflated. That was a bubble. This was a bubble back here in 2007, 2008. We got into bubbles and bubbles lead to crashes. Right now, I’m going to say the same thing. We are elevated but we’re not at bubble levels.

Let’s take a look at real estate. We’re going to take a look at intrinsic value of real estate. I think the best measure to look at real estate is the home price index compared to the median annual income. This is basically home affordability. This is home affordability. Now the historical range is between three and four. As you can see that really from 2009 to 2017, we were in the historical range. You can see over the past year or two, we have moved out of that. We’re now right around 4.4. Now at the top of the Great Recession, we’re up here at 5.3. Yes, we are above our average but no, we’re not at bubble levels at this point. I’m going to have to say the same thing. Real estate is elevated.

It is definitely above its historical norms, but we’re not at bubble levels. We’re not above bubble levels. If you can see the same tone we’re going through all these things that we’re saying that, “Okay, we’re sitting at the higher range, here is price to book value.” Now this is also again intrinsic value, meaning intrinsic value is this is what something is worth. This is literally what it’s worth meaning … And again, let me take what book value is in a stock. If you took a stock like Caterpillar, and you said, “Okay, what is its book value?” The book value is a caterpillar ceased being a business. What are all of its assets worth? What are all this machinery? It’s real estate? The cash on the books? What is all worth? That’s called the book value. If it was broken up and sold for pieces, that’s the book value. The price is the market price in the market.

The market price is almost always higher than book value, because there is a business. There is always something. But again, history has shown that when we get high price to book values, it can also lead to a market downturn. As you can see after 2007/2008 where we were at basically three times price book, we came down, and you can see that we’ve been working our way back up. We’re now even higher today than we were in 2007. Now 2007 to me it wasn’t a bubble in the stock market, 2007 was a bubble in the real estate market. 2000 was definitely a bubble in the stock market and you can see price to book ratios got up to five. We’ re elevated today, we’re not at bubble levels. Really, we’re seeing the same thing all around here.

Let’s talk about assets of safety. We showed you the market cycle and we showed you that okay, in the late cycles, what did best were utilities, consumer staples, and some as bonds in healthcare. Here is a chart on utilities. Utilities have been going up the whole time the market has been going down. This bottom one here, is the price of the underlying asset. This is the XLU. This is the utility ETF and the black line is the utility ETF and the orange line is the markets. As you can see here, this is done substantially better than the market over the past two months. We’re starting to get money flow into utilities. Let’s take a look at staples. Wow, staples made a new yearly high two days ago when the market was looking really shaky. You can see it is outperformed. We’re starting to see our performance in this sectors, we would expect to see in the late cycle of a bull market. If we break it all down again, I’ve got to say investor sentiment, that’s pretty neutral. I’m not seeing any excessive risk taking in the markets.

Now look, it’s still high but it’s not just crazy. If you want to see what crazy looks like go back to just last year when people were going crazy about Bitcoin. That’s exuberance, that’s craziness. We’re not there right now. That level I got to say is pretty bearish. Valuations? Again were neutral to bearish, were not crazy on valuations, but were elevated. When we take a look at intrinsic value same thing. Price to book ratios, real estate is elevated but again it’s not a crazy level and if we take a look a safe asset as outperforming, those are bearish. We wrap it all up and we say, “Okay where are we in the market?” I’ve got to say, and I’ve heard a lot of people say this on CNBC where I agree with them, we’re late cycle. We’re late cycle. Now look, it’s either, we either saw the top a month ago or we’re going to see the top in the next couple months, but we are definitely late cycle. All of these signs are pointing to, we’re getting to the end of this business cycle.

Now remember, where we started this whole thing we started at, look, everybody, there’s natural normal cycles to the markets. To ignore them is foolish. If you’re going to put any money at all, if you’re going to put a dime into the market, then you better understand these market cycles ’cause they are going to come whether you like it or not. The big question is, when the next downturn comes, what are you going to do about it? Now I’ve got to again, I might get a little bit upset here because this really does upset. Are you going to buy the BS that wall street has been shoveling down your throat, your whole life? That you sit through, just sit through it, just hold tight, just sit through it hold tight buy and hold. If their stocks go down 40% buy more. Now look, it’s been good and you have weathered some things but that’s because you didn’t know any better. Here’s the problem, is that Wall Street has never taught you any different way other than to hold or to sell. Think about that.

I’m guessing that if I were to talk to you back in 2007, if you had investments in the market and I asked you, “Hey, how do you feel about the economy?” You’d say, “You know what, I’m a little bit worried about it, but you know what, I’ve been told to buy and hold. I’m investor for the long haul so I’m not going to do anything.” But you probably could have told me that there were some problems going on. One of our traders mentioned the rising US dollar. Yes, rising US dollar we’re going to talk about currencies. Currencies are great tell of whether the equity market is going. We’re definitely getting run into the dollar and usually we get a run into the Yen but now it’s a run into the dollar. There are a lot of warning signs.

The point I’m making is number one, do you see them? And number two, are you going to do anything about it this time? Or are you going to do the same thing you did last time and let the train hit you, and you hope and pray that this time it comes back and you hope and pray that okay, this time, I hope it doesn’t take 15 years for it to come back like it did from 2000 to 2014. Here’s the problem, you’ve never been shown … Okay many of you haven’t been shown that there’s easy ways to do this. There’s easy ways. Now again, if you’re faced with just a binary choice, my only choice is to sell, which I’m worried that if I sell, I’m going to sell the wrong time. I’m going to miss out an opportunity or you’re only other choice is to hold meaning, okay, well, I’m going to sit through it and hopefully it happens. There’s so many other ways and that’s the problem is that people just haven’t been educated to learn this.

We’re going to go over really quick little thing index hedging. There’s lots of different strategies that you can use but again if your only choices are to sell or to hold that’s a really tough choice because a lot of people are worried about number one tax consequences. Well I can’t sell for tax consequences, they avoid their tax and then their stocks go down 40%. When they could have paid 10%, 15% of taxes, doesn’t make a lot of sense. Index hedging is a very easy way to basically freeze your risk. Again, intake hedging can be used as a way to reduce or eliminate the risk on your portfolio. Again, we’re talking about how to look at your whole portfolio and how to basically just freeze it. Now, again, you’re going to want to do this when you’re seeing unexpected market action.

Let’s take recently we’ve seen a lot of technical damage done on charts. We’ve seen a lot of weakness we’ve seen the price of oil plummet 20 to 25% over the past month. There’s a glut of oil and OPEC this weekend even came out and said that they’re seeing less demand for oil. That doesn’t happen if the economy is getting stronger. Right now if you don’t know any better your only choices are to sell and maybe be wrong or hold on and just hope it doesn’t get too bad. This is an easy thing you can do and you can do part of your portfolio you can do all of your portfolio. And the greatest thing it can be taken off anytime. Anytime you say, “You know what, I don’t want to be index hedging anymore, take it off. Take it off and you go right back to your position and then whatever happens after that happens.

All right so let’s talk about how this works. For most people it’s pretty simple. Now for us as professional traders, we have a little bit more difficult time doing this because professional traders all use derivatives. We all use futures, we all use Forex, We all use options. Again, equities are not super common, because again, there’s much better strategies or ways to do this. But for the average person there in, let’s just call equities and equity is I’m going to group together stocks, ETFs mutual funds, guess what? That’s just equities. So it’s actually quite simple, you need to create a negative amount. You need to create a hedge for the same amount of money that’s in your portfolio. So let’s do a quick little example here. So let’s say that you have an equity portfolio of $200,000. Let’s say you’ve got an IRA and your IRA has $200,000 in it. And in that IRA, you’ve got some tech stocks, you got some ETFs, you’ve got some mutual funds, and you’ve got an equity portfolio of mostly stocks for $200,000.

That’s actually really easy, if you take a look at the whole enchilada, the whole thing and then you create a short position of 200,000. Do you see how you are now pretty much hedge. Let’s say the market drops 10%. Well, if they does, this basket over here goes down to $180,000. You lost $20,000. However, your short position made $20,000. Oh my goodness. Look at that. You didn’t lose anything. Now remember, this works the other way as well. Let’s say you were wrong. The markets ran up 10%. This account grows to 220,000 and yes, you lost 20,000 over here. But do you see what happened? You basically froze your account at 200,000. By doing this index hedge you froze it 200,000. Hey whatever happens it’s frozen. Now if you’re right you’re going to be really happy. If the stock market again goes into recession and it drops that 30%, you’re going to save yourself $60,000. And at anytime you can remove that hedge and go back to your original portfolio, and your account is still at $200,000. You basically just need to hedge the amount of money you have at one side with a short position on the other side.

All right. Let’s talk about how to do that though. Based on your portfolio. Your goal is to find the index or the ETF that is most positively correlated to your underlying portfolio. Let me explain what I mean by that. Let’s say that you love technology stocks, let’s say you love technology stocks, but all of a sudden, a month ago you saw a whole bunch of problems with technology stocks, and you said, “Hey, I want to hedge my portfolio. I don’t want to sell my stocks. I like my stocks, but I want to hedge them out.” Let’s say you are $200,000 of technology stocks. You want to find the index, or the ETF that most closely matches your portfolio. Again, if you’re in technology stocks, it’s most likely going to be the NASDAQ. If it is, again, you have a lot of healthcare, you would use the healthcare ETF, and you’d sell that short.

Now, in your IRAs, this is one of the coolest thing, they have given you what’s called inverse ETFs in your IRAs, and again, some of you don’t even know about this. So one of the rules in your IRAs is you cannot sell short. If you have $200,000 in an IRA, and you’re worried about it going down, you can’t short $200,000 of the S&P 500. Well, what you can do is they’ve created what’s called an inverse ETF. It means that when the market goes down 1%, your ETF goes up 1%, so you are technically buying an inverse ETF, what’s happening is you’re still totally negating, you’re totally index hedging yourself out.

Again, finding these correlations is sometimes tough. We have a lot of tools for our traders to use, our traders use Finviz, we have elite membership for all of our traders, they can go in there and get any correlation they want. You can say, “Hey, what’s the most highly correlated stock to Netflix? What’s the highest inversely correlated stock to Netflix? What’s the highest correlation on this basket of these 10 stocks?” It’ll tell you these correlations, there’s a lot of cool websites out there that will also do that for you as well. Again, you’ve got to find the thing that’s correlated, and it’s a pretty simple equation. You simply, you have a hundred thousand dollars long the markets, go a hundred thousand dollars short the market and find the index or ETF that closely matches you. Again, obviously there’s more to learn about this, but hopefully you can see how simple that is. That is so simple.

Why hasn’t Wall Street taught you that? Hey, instead of just buying and holding like an idiot, why don’t you just sell 200,000 of Spiders, which is the S&P 500 and, you basically have frozen everything. You hold it for a month. You say, “Hey, I’m a little bit worried for a month.” And then after a month, take it off. Your account is exactly what it was when you decided to put your hedge down. Now again, if you were right, you save yourself some money. If you’re wrong, you lost a little of your gains, but you are no longer just sitting there like a deer caught in headlights watching your money evaporate.

All right, another strategy. An Option Collar. Again, this is such an easy strategy. Again, I wish I had more time to go into depth on these. Again, all of our traders know these strategies. But let’s just take Apple. Let’s just take Apple before earnings. If you are a chart reader, you can see that Apple was already in trouble when they announced earnings. The market was already in trouble, Apple was already in trouble. And let’s just say Apple was at 220. Let’s say that someone here had 200 shares of Apple at 220, and they said, you know what I really don’t like … I don’t want to be in the stock going into the earnings report. I’m a little scared about it. I’m a little scared it’s not going to be good news. But I don’t want to sell, maybe you were up so much, you don’t sell for tax reasons, or you just love Apple that’s why most people don’t.

There’s a really easy trading can do. This is an option’s trade. You sell two contracts for $220. Now again, what that does, it gives someone the right to buy your stock from you at $220, and they gave you $2 and 50 cents for it. Then you take that 2.50, and you buy two contracts of the 220 puts. Now I put 2.60, it’s probably going to cost you a little bit extra over spreads and commissions. There’s sometimes a little skew to the put side. But basically what happens is when you sell the 220 calls and you buy the 220 puts, you have completely locked in. Again it, only cost you 10 cents cause you brought in 2.50 and then you spent 2.60 so for 10 cents someone could have absolutely locked in $220. Now look if Apple ran up to 2.40, guess what would have happened? All right you would have made $20 on your stock, but you would have lost $20 on your call option.

Nothing happened. The stock plunged to 190, what happens? Well the put is worth 30 bucks and, you have the right to sell it for 220, or your put is worth 30 bucks. What happened to your stock? Oh yeah it went down 30 bucks. So what happened? Nothing. You completely froze the stock, at any time at all. At any time, you can go in and for really only pennies. You sell one option, you buy a put. You sell a call, buy a put. You’ve completely frozen that. This is so much better than, oh my gosh! Should I sell? Should I stay in? Just freeze your trade. Just freeze your trade, it might cost you 10 cents. Not a big deal at least you did something. Now again I’ve got to say that I use this strategy last year and hopefully … Actually I don’t think there’s anything wrong with this but just in case the IRS is listening, if you’re with the IRS go ahead and log off. I’m sure that didn’t happen.

But I actually had a really good gain in December. It was on a stock called Teva Pharmaceuticals. In December you know that we got the tax cut, we got the tax cut where in 2018, all your taxes are going to be lower. So why would I sell that stock in December? When if I just simply hold it and sell it in January, I’m going to pay a lot less in taxes, and it was a pretty big gain. But here was the problem. I thought it was going to give up all of its gains. If I sold in December I’d have to pay a lot in taxes, but if I tried to hold it till January maybe that gain goes away. What did I do? I did the January’s, I did the January options just like this. I sold the call, bought the put. I effectively made it to where nothing could happen. I effectively locked in my gain and I held it into January and I sold in January, and now I have to pay taxes on it this year, but I pay taxes at a lower rate. Again these are the things they’re really simple concepts, that gain you can take in and really learn.

Again this is just a real quick risk graph of what the collar trade is. And this is a color trade using different strikes. If you use the same strike price, it’s literally zero. But again on Apple, you could have sold the 225 and bought the 200. And you can see you would have played a little bit to the upside and then a little bit of downside. Again you totally get to decide how much risk you take. That’s the point I’m trying to point out, is that you’ve been sold, that all you can do is either sell and make a mistake as they will tell you, or you can hold on and hope it doesn’t get too bad. That is such BS. There’s so many things you can do, but it’s going to take some effort, and it’s going to take you being invested in your investments. Again, that’s just stuff to protect your portfolio.

Let’s talk about making money. I love bear markets. Oh my gosh. I cannot wait until the next bear markets. Bear markets, they’re so much faster, they’re so much bigger and you can make so much more money. Our 2008 at Mavericks was fantastic, it was fantastic. It was a great year. At most everyone was whining about their investments, we were loving it. I wish the market could crash every year. But obviously once it goes to zero, then the fun is over. So we need to have some bullishness in there. Again being bearish, all the things that you need to know again, you trade FX. FX is fantastic. When there’s a bear market in FX, oh my gosh! One of my biggest gains ever was in FX in 2008. One of our strategies that we absolutely would love in our FX division, is what’s called pyramiding. Basically, pyramiding is you take a first position. Once you are up on that position, and you’ve locked in at breakeven, you then add another position and if it keeps going your way you lock up your stop to breakeven and then you take another position. So you’re building positions.

Well, I did this on the Aussie yen back in 2008. And I built this up to like a 14 time position 14X and on the whole thing I made 240 pips. This was on a huge position, and I never took any more risk than I had on the first one exposition, and I pyramided it, 14 times and then it took a big fall I got out. It was my biggest gain to date, on that Aussie Yen. So buying the Japanese Yen crosses in FX fantastic. Right now, if we get a crash … Right now is the dollar that’s showing the strength, but I’m telling you, if we get a real market crash, the Yen is going to be the thing to buy. You can short stocks, you can short ETFs, you can buy inverse ETFs, you can buy levered inverse ETFs. These are one of my favorite things to trade now is the three X ETFs. So if the market goes up, 1% your ETF moves 3%. It’s a great way to get some leverage.

Again, options. We love options at Maverick we’re an options trading firm, so everything we do is pretty much all about options in our option division. Then we have our FX division as well that again, just really fun. I love bear markets. And I’m really sad that we have not seen a good bear markets in years. And I cannot wait. I cannot wait until it happens and guess what? I’m not going to be surprised when it happens. I’m excited for it to happen. Can you imagine … Sorry, I meant shorting Japanese Yen crosses. You definitely don’t want to buy cross Japanese, Yen cross you want to sell … There we go. But basically, you want to be long the Yen. That’s the that’s the key, be long the Yen. But isn’t that cool? When you are a trader, you get to say, “I’m excited about the next downturn.” Right now, as an investor, you’re terrified, you’re scared? When is it going to happen? What’s going to happen to me? How bad is it going to get?

Tony? I’m excited. So again, here’s one of the Yen crosses. We did this trade during Brexit and once it really started to look like Brexit, it wasn’t going to go … When it was going to get voted on, we took a short … Awesome short again and again just with the lot. This is a hundred thousand position that’s going to cost about 4000 to put on, even less than that about 3000 put on. This would have made 10 grand off of 3000. It’s just a fantastic drop. So these are the kind of movement you see in currencies. Currencies are so fun, so fun in bear markets, because the moves are big, and they’re pretty predictable. All right. Wow! We got through a whole lot of stuff today.

Basically what I really wanted you to take away from this is number one, stop being a passive investor. Stop being a bystander. Now what I mean by that is like look, you either have some money in the market, whether that’s in a 401k and IRA, whether you’re trading a little bit, whether you’re trading active. Be involved with it, be active. Some of you are spectators, and I challenge people all the time, especially people that are older. I’m going to say, look the stock market has been around your whole lifetime, and you haven’t found the desire or the guts or the money to get into it. And you of course, could have found the money at some point in your life. I mean, if you’re a 50-year old, I can’t stand it when I talk to a 50-year guy, “I don’t have the money to invest.” And I’m like, “Oh my gosh! In your 30 years of working, you never had any extra money to invest?” No, that’s not true. You simply didn’t want to do it because it’s not instant gratification.

You can find the money. People to say that, “Oh, I can’t.” Because of the money, that’s BS. If I were to lose everything, I would have to go get a job, and I tell you what, it would take me three months to make enough money, to get into account start it back up. And I would be back in the game, and I would get it all back. The money is not an issue, it just takes the desire. So I’m specifically calling you out, stop being a bystander, stop being a spectator. If you have money in the markets, start managing it. Start taking control. If you don’t, if you’ve been a bystander watching everyone else make money in the market, why don’t you get in? But why don’t you get in the right way. Be smart about it. Study, practice, all that stuff.

Use your street smarts. Look, you are smart enough to know that things are changing. I’m seeing some things changing right now in this economy. I’m starting to see home prices softening a bit. I’m starting to see car sales soften a little bit. I’m starting to see these things. You’re starting to see them as well. Use your smarts it’s telling you’re smart. Look you see things. You’re starting to see that we’re starting to see some cracks in this economy. We may have another leg higher, I’m not saying that this at the top but what I’m saying is a lot of the signs of a top are here. Use them and again, learn.

This is the big thing, like I said, some of you have a small trading account. Some of you have a large account and a very serious about it. Some of you just have some retirement accounts, and you’re trying to see what you want to do. Look, it’s all about learning. Get in to learn. There’s lots of stuff online, Maverick has a lot of stuff that you can learn, again stop being passive. Stop believing Wall Street telling you if a market crashes, don’t do anything. Just hold on. Some of you who have gone through several cycles and done that. Now, look you’ve been okay, you’ve done okay, the market has come back but what if it doesn’t next time? Stop being passive. Start participating in your money.

All right. Well let’s wrap this up with a quick little plug for Maverick. Hopefully you’ve enjoyed this session. Hopefully I haven’t been too brutal. I feel like boy, just really, really yelled at you. Look sometimes that’s what it takes. I’ve got a 17-year old son who, he will only move if we yell at him. It’s kind of sad, right? My daughter is kind of a self starter. She has already done what she wants to do. My son it takes a little yelling, and you know what? I don’t mind it. I don’t mind it. Because I know that without that yelling, he probably wouldn’t do anything. Now look, he may not like me as much for it, just kidding. We get along just fine. But it’s in his best interest for me to yell at him to get him going. Same thing here. Some of you need to get off your butts and get serious about your future.

Like I said, people that I meet that are 50 and 60 and say, “Oh you know what, I never had the time, or the money to do it. BS. Look, maybe you don’t right now, I understand that, I understand, we’re all busy. We all have things going on. I get it. But somewhere in your life there has been a moment where there is a moment. Take the chance. Go ahead, take the chance, start getting serious about managing your money. At Maverick Trading what we do is we train traders to be professionals, not just open up a new trade account and tinker out around a little bit. We teach people, “Hey you’re going to make a living out of this. So we have two separate divisions, we have an options division, and we have a Forex division. So our main division, our options division is mavericktrading.com So if you go to mavericktrading.com we have some free sessions there we’ve got some other things there for you as well. If you’re more interested in Forex, I love Forex. I cannot tell you how much I love Forex trading. maverickfx.com.

Go check it out there. Again, we’ve got some continuing education classes that you can watch, just at your leisure. But just for coming here tonight, we would like to offer you a seven-day trial, that gives you full access to everything. So go in, take some of the classes we have, take some of the tests we offer. Just really cool. We’re giving you opportunity. Hey, go get started. If you’ve been putting this off, go get started. We’re giving you some ways to do that. Also, join us for our Sunday trading room. Every Sunday, we have a trading room at 9 PM Eastern time. If you are more interested in FX, our trading room is at 10:15 PM Eastern time. So we’d love to have you join us for those. We get together as a firm every single Sunday night, and we talk about getting ready for the week. We talk about the trades, we talk about the setups, we talk about the markets, and I kind of feel this is where we all get together to go to battle on Monday.

Your recruiter will be … You’ll be assigned a recruiter after this, they will reach out to you and basically say, “Hey would you like to get a free trial? Would you like to get started? And some of you are going to want to become traders for Maverick and that’s when again tell your recruiter, hey I really want to take a look at becoming a national trader for Maverick. You don’t know what we do at Maverick, we provide trading capital for our traders. So again, if you ever say, hey, money is an issue. Yes, I know how to trade some. I’m good at trading, but I don’t have enough capital to make it worth it. Look, we put up capital for our traders. So if you’re interested in applying for a trading position, talk to your recruiter or better yet, go and fill out an application online. You’ll see where to go on our websites.

All right. Hey, thank you so much for joining me again. Again the last thing I’m going to say because I’m already about 10 minutes over, do something. And it’s the same thing I tell my son. I don’t care what you do, just do something. Action always beats inaction. Even if it’s wrong. You’ve at least made a step. Doing nothing is almost always the wrong thing to do. Take action, do something. Take an opportunity. Take a chance. All right. Thank you so much for joining me everyone. Take care. Bye.