Will the Market Ever Correct?

There is no doubt in my mind that this is the calm before the storm. Volatility has absolutely collapsed and the economy is showing some signs of life, leading pundits to believe that stocks are on an unstoppable push higher. There is a reason capital always gets wiped out in a debt crisis, and when extreme volatility finally does arrive, you will understand why.

Even though stocks are overdue for a correction, I won’t ever suggest going short because it’s a very asymmetric trade: your downside is unlimited and your upside is capped. These are not the kind of trades I like. If anything, go long volatility via puts and think of it as a hedge against your gold positions. This is a relatively conservative way to make a bet against an overvalued market.

Right now the market is being overstretched relative to its 200-day moving average. If you look at similar periods of over-extension, you will notice that the market soon experience a substantial correction.

If I had to hazard a guess, I would say that the market will move above 1400 before coming back down to earth. We may very well see a day soon when the market spikes higher, which in essence reflects short-sellers capitulating. This is when more aggressive traders should seriously look into buying long-dated puts.

The dollar is most likely going to rally sharply before it collapses, and this is going to be brutal for stocks. Long-term it is correct to be bullish on U.S. stocks; however, in the short-term it is a dangerous game to play.

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  • Pat

    I believe that Doug Casey would agree with you.  That would put you into some pretty good company.

  • Pat

    Just occurred to me that maybe that would put Doug Casey into some pretty good company.

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