2020 has been one of the worst and best performing years for the stock market ever, depending on who you ask. If you had the displeasure of being on the wrong side of this trade or missing out on this massive rally, do not fret. There will be many more opportunities in the future. However, if you are looking to make a significant amount of money in the next crash, you are in the right place.
Definition of a Stock Market Crash
A stock market crash can be defined in many ways. There are so many variables that go into a crash, but some are more important than others. Probably the best way to describe it is “a sudden and sustained precipitous fall in widespread stock prices, rapidly increasing volatility and extraordinary world liquidity-draining events.”
These concepts are important, because you can have multiple features of a stock market crash, without the markets actually crashing. Ergo, you cannot make money on the crash. We are looking for a sustained drop in a volatile environment to make MILLIONS.
Otherwise, forget it, the market is too difficult to time a crash just based on a hunch.
So let us start with this as a baseline. You need a sudden, unexpected drop in stock prices. This cannot be one individual sector, it must be multiple sectors falling simultaneously.
Similarly, you need high volatility to lead or follow the plunge.
Finally, you need an external shock, like an economic meltdown or, more recently, a global pandemic. This external event is not worthy of note unless it is a liquidity draining event. Stocks go up from liquidity, not the economy. The economy is wholly unrelated to the stock market, believe it or not. It is extremely important for you to internalize this concept.
All of these factors must be true to get an actual stock market crash, otherwise you are just going to lose money on a rapidly bought dip.
If you would like a brief history lesson in the most precipitous stock market crashes in history, check out this article from Business Insider. There is a lot to learn from each one, but they all essentially happened the same way.
Among the top crashes, the most noteworthy are:
- The Panic of 1907
- Infamous Crash of 1929
- “Black Monday” Crash of 1987
- Japanese Asset Bubble Burst of 1992
- Asian Financial Crash of 1997
- Dot-Com Bubble Burst of 2000
- Subprime Mortgage Crisis of 2007-08
- The COVID-19 Crash of 2020
Each of these crashes was defined by a massive drop in widespread stock prices, high volatility and an external liquidity draining event.
For example, just recently, in response to the COVID19 pandemic, investors rushed head first to get their money out of the markets. People were selling at any price, causing many stocks to drop 5 to 20% per day.
It was a terrifying time if you were a long term investor at the time. We reached extreme fear levels from extreme greed levels, which is very rarely seen. See CNN’s Fear and Greed Index:
This has happened many times before, and in each case of extreme fear, the market generally fell 15-20%+.
One can look around and point to any number of warning signs lurking in the shadows. However, yes, the market is extremely bullish of late. Yes, the 4th quarter is usually the most bullish time for the market. Yes, there are certain sectors going absolutely insane (EV stocks, in particular). You can read about our QuantumScape call, which, as of today, is up 1100% since the time of writing.
Nonetheless, there are lots of warning signs out there.
One of the top warnings signs out there can be summarized in this Seeking Alpha Article:
The longest consecutive data source of trailing P/E data available to me stretches back to 1954, which is why these graphs all begin with that date. Everyone likes to use their own price-to-earnings measure. It can be trailing, forward, with varying time horizons, interest-rate adjusted, operating-focused, and with and without extraordinary items, among many different flavors. What matters most here is that it is a time consistent source. For the purposes of this article, graphed below is the S&P 500 index level divided by trailing twelve month earnings per share before extraordinary items. The long-run average of this measure is about 16.8x, and the ratio currently stands at 28.9x, roughly 72% higher than the long-run average.
See chart used by the author of that article:
This is a chart of the ratio of Price compared to earnings for the companies in the S&P500. As you can see, are now at 2000 tech bubble levels.
Clearly, this data in itself is not cause for concern considering the market continues its slow march higher.
However, if you are a long term invest…this is clearly cause for concern.
Tech Stocks Are Going Bananas
Another warning sign is the disturbing percentage gains made in certain sectors, particularly EV stocks.
As aforementioned, the market today echoes warning signs of the tech bubble boom of 2000. As you may know, that bubble did not end well, leading to a protracted bear market.
While we have been predicting massive gains in many of these stocks for a while now, we are reaching dangerous nosebleed levels.
Here are some examples of the biggest gains out there giving us caution signals (1 year gains from low to highs):
- NIO Stock: ~2500%
- TSLA Stock: ~1000%
- PLUG Stock: ~1500%
- Zoom Stock: ~1000%
- Fiverr Stock: ~1000%
- FuelCell Stock: ~1000%
- Etsy Stock: ~800%
- Pinterest Stock: ~700%
These are just a few examples and many are trading 2,3,400% higher since the March crash. Good work if you were able to buy and hold these!
Next, while these are extraordinary returns from great companies, the fact that the gains are so large without the corresponding revenue/earnings growth is cause for much concern.
We are not in any way claiming these stocks are overvalued, or that you should short them, or anything like that.
This is just an observation in our overall thesis that the market may crash soon. After all, this level of performance is eerily similar to the Tech Bubble of 2000.
Why We Believe A Stock Market Crash Is Coming
If you have been in the stock market in the past year, you may know have heard of the “greatest trade of all time.” If you are wondering what this trade was, check out this Barron’s article from end of March 2020.
According to Barron’s:
Billionaire investor Bill Ackman announced earlier this month that he had been hedging his portfolio against market volatility spurred by the coronavirus. The bet paid off handsomely.
Ackman’s Pershing Square Capital Management hedge fund laid out $27 million to buy credit protection on global investment-grade and high-yield credit indexes. The purchases, which were made late last month when credit spreads were tighter, carried limited downside risk but the potential for significant upside. Ackman said Wednesday that he finished unwinding the hedges on Monday, reaping $2.6 billion in proceeds.
Yes, you read that correctly. Bill Ackman and his fund generated $2.6 Billion in proceeds on a $27 Million dollar trade. This trade is considered one of the most profitable, if not the most profitable, trade of all time (in such a short period).
Imagine making a couple billion on a few million? It has been done.
The best part is…it can be done again. And we think it’s coming soon.
Tech stocks are way overheated, there is no actual growth in the economy and small businesses are shutting down at the fastest pace on record.
It is nearly impossible to estimate the amount of small businesses that will be permanently shut down considering COVID lockdowns appear to be an ongoing power that government has granted itself in perpetuity.
Stock market crash…Why, when, where and how?
Well, the easiest way to explain is that…Mr. Ackman is now placing the same bet.
Can you believe it?
Ackman Is At It Again
According to a recent MarketWatch article titled “Bill Ackman’s ‘single best trade of all time’ turned $27 million into $2.6 billion — now he’s trying it again” :
That’s billionaire investor Bill Ackman talking at a digital conference to private equity investors and investment bankers this week about his latest wager on what he believes will be a rough stretch for American corporations due to the economic hit from the coronavirus pandemic.
The trade, according to the Financial Times, is virtually the same as the $27-million bet he placed eight months ago, which earned him a whopping $2.6 billion and was hailed in an op-ed in the New York Times as perhaps “the single best trade of all time.”
While Mr. Ackman’s trade is not the full size of what he placed last time, it is still a warning sign for those who are 100% long.
Even better, it is a sign that it may soon be possible to make extraordinary gains on a future stock market crash.
So how does one actually make a lot of money on a stock market crash?
How To Make Millions In A Stock Market Crash
Finally, we have reached the point where we get to discuss how one actually performs that act of “betting against the market.”
To a market permabull these days, trying to bet against the market now appears to be a totally insane action.
The market has gone up, virtually uninterrupted, for months. Massive fortunes have been made on the aforementioend tech and EV stocks.
Perhaps many more gains will be made, and we will be writing about them for sure.
Regardless of the here and now, here is how you can make millions in the case of an actual stock market crash.
There are several primary methods, some more profitable than others.
But overall, these methods are the most profitable and require low levels of capital to win. The top methods include:
- Buying Way Out of the Money Put Options on Index ETFs (SPY/QQQ)
- Buying Vix ETF Call Options (UVXY or VXX preferably)
- 3x leveraged inverse ETFs (SQQQ, SPXU)
Each of these has its benefits and drawbacks. However, each possess the power to return massive gains if used correctly.
Each of the methods listed above, if used correctly prior to a major crash, can yield unbelievable returns.
In the case of “Way Out of the Money Put Options,” the strategy is simple, and can be illustrated with an easy example.
Let’s say the $SPY (SPDR S&P 500 ETF Trust), which tracks the S&P500 is trading around $370 currently. You see the warnings signs of a pending market crash and decide to buy way out of the money put options.
These put options (contract between two parties designed as hedges on a position, where one party agrees to potentially buy 100 shares of a security at a certain price and the other party agrees to sell those shares), given the low volatility and distance from the current trading price will be extremely cheap.
So, using our example above, you decide to buy $250 strike price puts a few weeks out for a few dollars. Let’s use $5 for this scenario, denoted as .05 in options terms.
At $5, you can even buy 20 of them and only spend $100.
However, if the market start to get whacked, and the SPY gets smacked down to $250, you could be looking at extraordinary profits.
With 20 contracts at $5 each, you could potentially see those contracts turn into $200 each, a 40x return.
Put this way: $200 x 20 contracts – ($5 x 20 contracts) = $3900 profit.
No, it’s not magic, it’s trading.
And the magic of a market crash is that you can make absurd returns in a short period of time.
Just think if you multiplied those original $5 contracts by any amount. Let’s say you got 100 of them for $500. If they hit, you would be looking $20,000 in return minus the original $500 initial investment.
At a 40x+ return, just do the math you need to literally make one million dollars.
Now that’s a big deal…
Let’s say you want to go with VIX ETF Call options instead of spy puts. Technically, volatility is what you are betting on to explode. We will explain why in another article, let’s focus on the method and example, in the interest of this article.
The two primary VIX ETFs are UVXY and VXX.
In this example, you are using a volatility instrument and hoping it explodes as stocks being to decline rapidly.
So, for example, you buy a WAY out of the money call on UVXY.
Let’s say UVXY is trading at $10 and you buy a $100 call option and the market crashes, UVXY reaches $100.
In this example, let’s say you are able to get a $100 call option for $10.
To simplify, I have generated an option price projection using Options Profit Calculator below:
Depending on where UVXY ultimately ends up, you can make anywhere from 300,000% to 40000%.
Just do the math to see how much you need to make $1 Million dollars.
3x Leveraged Inverse ETFs can be very profitable, although nowhere near as profitable.
While this method is not as profitable, it is also not as risky. Extremely risky, but not as risky, considering you can lose your entire investment on an option.
Let’s say you buy 100 shares of SQQQ for $1600 and the Nasdaq (QQQ) crashes 20%.
Technically, you make 60% because these ETFs are 3x leverage.
However, if you buy the call options on these inverse ETFs, they will move 3x faster and return significant gains as well.
Please use Options Profit Calculator to see what you can generate hypothetically in the event of this market crash.
Conclusively, we hope this has been informative. Yes, there are fortunes to be made in future market crashes, to be sure. The only question is…when?
Do not worry, we believe this market crash is coming soon. The statistics are there.
Unprecedented levels of small businesses going bankrupt. Tech stocks going bananas. P/E ratios in the stratosphere.
The facts are staring at us in the face.
However, let’s be realistic, this market feels like it can keep moving higher forever…right?
Markets eventually need to cool off after parabolic moves. Thinking like a permabull is great 95% of the time. However, do not lose sight of the fact that the rug may always be pulled from under your feet.
If you are sitting on some big gains, it may be time to take profit. We are not recommending you do anything, just know the facts.
And remember, there are BIG gains to be made in the next stock market crash.
Here are some great videos to watch if you subscribe to the bearish hypothesis.
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