REAL NEWS — Why the Media’s Dead Wrong About A Market Crash
Are we getting close to the end of the current bull market?
Worse yet, are we approaching a major sell off that could destroy your wealth?
The mainstream financial media seems to think so.
In fact, over the last week many outlets have been non-stop highlighting one trader’s giant bet that the market will soon crash.
They say this trader is so confident that a market collapse is coming, he’s put millions on the line that will only be recouped if the stock market takes a major tumble this year.
Today, I want to explain the details behind this apparent bear market bet, and then we’ll unpack what it could mean for the market — and more importantly for your investment account this year!
The Doomsday Bet That Spooked Main Street Investors
Last week, investors were tipped off to an alarming position that an institutional trader has been building.
The position is an options bet that will only pay off if the market’s “fear index” jumps by 500%.
Digging into the story, my research team found that this trader has committed more than $5.9 million — a very large bet in dollar terms — that will be completely worthless unless the market takes a huge tumble and investors become much more fearful.
Technically speaking, this trader bought $5.9 million worth of “out of the money” calls on the CBOE Volatility Index (VIX).
You may have heard me talk about this index, which is tied to the options market and only spikes higher when there is a panic in the stock market.
So this trade is a huge bet that will result in a 100% loss of the market remains stable, and can only be profitable if we have a terrible event happen this year.
It’s no wonder the mainstream media kept running this story!
They must have known they had Main Street investors glued to their TV sets wondering, “Does this trader know something I don’t know about the economy? Is the smart money bailing out of the market?? Should I be preparing for a sell off???”
That way they could sell their ad slots for more money…
But before you get too worried over this recent 5.9 million bear market bet, let’s take a look at all the possible scenarios and think about all the different reasons this trade could have been placed.
Motivations Aren’t Always What They Appear to Be
Over the last 10 years, I’ve learned some important lessons about bearish trades like the one I just mentioned.
The most important one being, “Don’t ever take a negative bet at face value.”
You see, there are a number of different reasons a big institutional trader could place this type of bet. And many of these reasons do not mean this trader expects the end of our current bull market.
For instance, this trader may be a large mutual fund or pension manager with hundreds of millions of dollars invested in the market.
For this type of trader (of which there are many), a $5.9 million bet on a VIX spike would simply be a cheap insurance policy in case something unexpected happens and the market takes a temporary tumble.
In this situation, a big institutional investor would be happy to lose the $5.9 million of the market continues to trade higher. Because he would make many times that amount from the more traditional stock market positions he is holding.
It may also be helpful to think about this trade within the context of some of the recent minor pullbacks the market has experienced.
Back in January of 2018, the U.S. stock market had a quick drop and the VIX rocketed above 50. (Today, the markets are calm and the VIX is trading near 14.)
Keep in mind, this spike occurred in the midst of the longest running bull market of all time. And the recovery in the market was very swift!
But if another quick fear spike like the one from 2018 occurred — sending the VIX back to 50 — this trader could potentially lock in a 5,000% return!
Think about that for a second… if you could bet $100 to potentially get a gain of $5,000, you might make that bet even if there was only a slight chance of success.
In fact, you could place this bet 49 times, and lose every single time… And then make all your losses back in one pullback like we saw in early 2018.
That’s the beauty of the way some options plays can be set up. Your potential gain can be many times more than what you invest.
Digging a bit deeper, our St. Paul Research team has found that one trader has been making VIX bets like this for months. So this appears to be a “just in case” trade that will lose a (relatively) small amount over and over — until one big payout potentially makes up for all these losses.
State of the Market in 2020
As we work our way through the first full week of trading in 2020, I’m seeing a lot more to like about this market than reasons to be afraid.
In fact, given the unexpected rise in Middle East tensions, I’m happily surprised to see that the market has hardly budged! It seems the positive momentum from last year continues to be much stronger than the new risks from geopolitical unrest.
We’ve talked about the “wall of worry” that the market climbed throughout 2019. Investors have held money on the sidelines because of issues they were worried about, only to find themselves left out as the market rallied.
This scenario typically leads to a strong and steady bull market because that cash slowly comes back in through buy orders, helping to drive stock prices higher.
As we kick off this new year, it appears the Middle East tension has added another brick to this wall of worry.
Meanwhile, the European economy is picking up, the trade war with China is improving, U.S. corporations are growing profits, the U.S. job market continues to expand, and the investors watching from the sidelines have even more reason to get their money back into the market.
It’s a great time to be an investor!
So don’t let the news of a “doomsday bet” or some other wall of worry concern keep you from locking in your gains from this healthy market.
Here’s to growing and protecting your wealth!