The Market Is Headed For A Correction… Here’s How To Protect Yourself

If you had bought shares of (Nasdaq: AMZN) in April 2012, you’d be up 175%. That’s an impressive return, especially considering the S&P 500 is only up roughly 50% during that time.

But if you’d followed my Amazon trade last week, then you would have made the same amount in three days. And no, the 175% return is not an annualized gain.

I spotted the trade using my earnings algorithm. It’s a system that helps me predict — with impressive odds — whether a company will beat or miss earnings estimates. It helped me become one of the youngest successful traders on the Philadelphia Stock Exchange, and I continue to use it to this day to give me an edge in the markets.

So when my algorithm signaled that Amazon had good odds of beating analysts’ estimates when it reported on July 23, I immediately sent an alert to my readers. I recommended they purchase call options on Amazon, which would allow us to amplify our gains if shares moved higher.

Two days later, Amazon announced earnings that smashed expectations. Shares shot up 20% when the market opened the next day. The call options I recommended gained a mind-blowing 175%.

We’ve closed several other big winners in the past few weeks. We made:

— A 30% profit in nine days from a 5% move in Wynn Resorts (Nasdaq: WYNN).
— A 50% profit in 15 days from a 4% move in iShares 20+ Year Treasury Bond (NYSE: TLT).
— A 51% profit in seven days from a 5% move in Dillard’s (NYSE: DDS).

That’s what I love about trading options. It allows us to generate gains in days that most investors hope to achieve in years. And right now, more so than at any point this decade, I believe investors should consider adding options to their trading arsenal.

In short, the market is flashing several red flags that have preceded past market downturns.

For example, the forward price-to-earnings, or P/E, ratio of the S&P 500 is at a 10-year high, which means stocks are extremely expensive. In fact, the current forward P/E is significantly higher than it was in October 2007, when stocks began a 17-month, 57% decline.

There’s only one way for the P/E ratio to get back to a more reasonable level that doesn’t involve stocks falling, and that is for earnings to increase significantly across the board.

One way companies boost earnings is by cutting costs. But that’s not an option for most companies currently since gross margins are the highest they’ve been in the past decade. In other words, companies are operating at or near peak efficiency.

That wouldn’t be a bad thing if revenue was growing, but that’s not what is happening.

According to FactSet, revenue at S&P 500 companies is expected to fall 4% year over year in Q2. If analysts are correct, then this will mark the largest decline in revenue since Q3 2009 and will also be the first time the index has seen two consecutive quarters of sales declines since 2009.

Another major red flag can be seen in the U.S. dollar index, which is also currently at 10-year highs. Historically, the S&P 500 typically has had an inverse relationship to the U.S. dollar. It’s called a negative correlation. If the dollar is strong, then the S&P 500 tends to be weaker and vice versa.

But right now, the S&P 500 and the dollar are both at record highs. Something’s got to give here, and I don’t think it will be the dollar. As the Federal Reserve raises rates, it’s likely the dollar will get even stronger in the short term.

All of this paints a bleak picture for the market in the coming weeks and months. And if you’re a buy-and-hold investor, odds are you’ll see the value of your portfolio deteriorate.

Purchasing put options, which increase in value when the underlying security falls, is the best way to protect or even grow your portfolio during a market correction. When markets fall, they tend to do so fast and violently, so the time to prepare is now.

Two weeks ago, for example, subscribers to my Profit Amplifier newsletter purchased puts on iShares China Large-Cap (NYSE: FXI), an ETF that provides exposure to China- and Hong Kong-based stocks. Seven days after entering the trade, the Chinese market experienced a sudden drop. We walked away with a 39% gain.

These are the kinds of trades I recommend each week in Profit Amplifier that are not available to buy-and-hold investors. Not only is it extremely rare to see these kinds of gains from stocks over a few days, but 99% of investors never make a cent from falling stocks.

So if you want to start amplifying your gains as stocks move up or down, then I urge you to give my service a try today. Not only will you get access to my latest trade — which has the potential to generate 38% profits from Apple (Nasdaq: AAPL) in coming weeks for a fraction of what it would cost to buy the shares — but you’ll get new trade alerts from me on a weekly basis.

You’ll also receive my earnings algorithm report — Revealed: Jared’s Secret Earnings Algorithm — if you join today before midnight. In it, I’ll tell you exactly how I can predict with such a high success rate which stocks will beat or miss earnings estimates. But it’s only available today. Follow this link to learn more.

P.S. My publisher is offering new subscribers 60 days to try out my service at no risk. You can cancel any time during the first 60 days for a full, 100% refund. If you’re ready to join, click here to get started.

— Jared Levy

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About the Author: Jared Levy