Over the past few weeks I have been watching the DOW and Transportation index
closely because it looks and feels like the Dow Theory may play out this year
and the stock market could take a 15% haircut.
But what if you skipped on the haircut and opted for a 40% refund? What? Keep
reading to find out how.
Keeping this post short and sweet, I think the US stock market is setting
up for a sharp selloff. And it will look a lot like the July 2011 correction.
If my calculations are correct this will happen in the next 3-9 weeks and we
will see a 15% drop from our current levels. Only time will tell, but I have
a way to hedge against this with very little downside risk to you ETF
portfolio.
The Dow Theory Live Example for ETF Portfolio
The daily chart of the SP500 index below shows our current trend analysis
with green bars signaling an uptrend, orange being neutral, and red signaling
bearish price action. Currently the bars are green and we can expect prices
to have an upward bias.
The Dow Theory could be in play. When both the Transports (IYT) and the Dow
Jones Industrial Average (DIA) cannot make higher highs and start making lower
lows, according to the Dow Theory the broad stock market is topping.
We are watching the market closely because they have both made lower highs
and lows. This rally could stall in the next couple weeks and if so we expect
a 15% correction.
Take a look at the 2011 Stock Market Crash
The chart above shows how fearful traders have a delayed reaction to moving
money from stocks to a mix of risk-off assets.
The choppy market condition during August and September clearly helped in
frustrating investors and created more uncertainty. This helped prices of this ETF
portfolio fund rally long after the initial selloff took place. This is
something I feel will take place again in the near future and subscribers of
my ETF newsletter will
benefit from this move.
Because we have a Dow Theory setup, our risk levels are clearly defined as
to when to exit the trade if it does not play out in our favor. But with the
potential to make 40% and the downside risk only being 4%, it's the perfect
setup for a large portion of our ETF portfolio. And just so you know
this is not a precious metals trade as we are already long that sector and
up 10% in that position already.
