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What's the Next Downward Catalyst

I've been saying sometime now that there will most likely be new lows in the equity markets this year... but I can't say when.

Notice that the large, downward-sweeping, capitulative moves in 2008 were mainly event-based. These events compromised the structural integrity of our financial system, forced redemptions in funds, and dissolved any trust in risk assets that investors may have had.

But can it get any worse? Yep.

What we have to be well aware of is the 3-sigma events that have a very low probability of happening, but when aggregated, the probability increases into a higher expectancy.

Let's go ahead and list off some possibilities:

  • Another bank failure
  • T-bill Collapse
  • Auto Bankruptcy (this will happen within 2 months)
  • California Bankrupcty
  • Any other state Bankrupcty (Mississippi comes to mind)
  • A petrostate collapse
  • Accelerating unemployment
  • Sovereign debt restructuring
  • Currency collapse

In the intermediate term, all of these are possibilities.

But what does this mean for retail traders? Stay agile, keep cash, and hedge against risk.

But stop worrying. If your portfolio is keeping you up at night, buy some freaking puts.

One of the more constructive things you can do with your time is get a list of 10-20 stocks you want to own at certain prices (KO below 40, for example), and develop your trading plan if and when we see new lows. That way if we do hit new lows you'll be ready to pull the trigger when the time comes.

by Steven Place

Steven Place is the founder and head trader at investingwithoptions.com/