How Much Will a 15% Sell-Off Cost Your ETF Portfolio?
If the Dow Theory is in play, investors can expect a sharp correction in the US stock market.
But what if you skipped on the haircut and opted for a 40% refund?
Keeping this post short and sweet, I think the US stock market is setting up for a sharp sell-off. And it will look a lot like the July 2011 correction. If my calculations are correct, this will happen in the next three to nine weeks, and we will see a 15% drop from our current levels. Only time will tell, but I have a way to hedge against this with very little downside risk to your ETF portfolio.
The Dow Theory Live Example for ETF PortfoliosThe daily chart of the S&P 500 Index (INDEXSP:.INX) below shows our current trend analysis with green bars signaling an uptrend, orange being neutral, and red signaling bearish price action. Currently the bars are green, and we can expect prices to have an upward bias.
The Dow Theory could be in play. According to the Dow Theory, when both the Transports (IYT) and the Dow Jones Industrial Average (DIA) cannot make higher highs and start making lower lows, the broad stock market is topping.
My firm is watching the market closely because they have both made lower highs and lows. This rally could stall in the next couple weeks and, if so, we expect a 15% correction.
Take a look at the 2011 Stock Market Crash.
The chart above shows how fearful traders have a delayed reaction to moving money from stocks to a mix of risk-off assets.
The choppy market conditions during August and September clearly helped in frustrating investors and creating more uncertainty. This helped the prices of this ETF portfolio fund rally long after the initial sell-off took place. This is something I feel will take place again in the near future.
Because my firm has a Dow Theory setup, our risk levels are clearly defined as to when to exit the trade if it does not play out in our favor. But with the potential to make 40% and the downside risk only being 4%, it's the perfect setup for a large portion of our ETF portfolio. And just so you know, this is not a precious metals trade, as we are already long that sector and up 10% in that position already.
Editor's Note: Chris Vermeulen offers more content at his sites, TheGoldAndOilGuy.com and Traders Video Playbook.
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