2022 has started off with higher volatility – both implied and real. This has been most felt in the US markets, with the NASDAQ exhibiting whippy price action over the course of the past week. Although FX and FI markets have been calmer, the crypto space has also seen a strong move lower. Bitcoin broke below $40k to post three month lows, having fallen like a stone since we entered the new year. Here are a few ways that we’d aim to profit if this general move continues.
Don’t marry trades up
It’s more than likely that most of our readers have existing holdings in the stock market. Depending on the entry point, these are likely in the red or have seen a chunk of profit being taken away. In this situation, we’d look to take on opposite positions to ensure trades don’t marry up. What we mean by this is that if you have core long positions, it could be considered to take on some short ones as well.
This means that firstly you aren’t doubling up on existing exposure (in case this move lower continues) and secondly that you can profit if the market does crash. The short positions will become profitable, and at some point can be closed out for a profit when we feel that the market is starting to turn back. We currently hold a PENN short in our portfolio at the moment.
The risk with taking on shorts is that the risk is unlimited. With a long position, the share price can only fall to zero, capping losses. But with a short, the share price in theory could go to infinity. So it’s important to look at the potential downside before adding on shorts.
Take on dividend payers
For those with a long only, long-term outlook, adding dividend stocks is a strategy that we like a lot. A falling share price causes the dividend yield to increase (assuming the dividend per share remains the same). This means that currently, there are some top stocks with yields in excess of inflation. These include Rio Tinto and Devon Energy, that we have written about recently.
Even if the share price continues to fall after buying, we can pick up the dividend income during the crash. Then with the long-term outlook, if the crash eventually recovers then the share price should breakeven as well. Ultimately, with the dividend income, this would represent a profit during the market crash period.
Look at alternative asset classes
For those that think the crash will be concentrated in stocks and crypto, we suggest looking to other asset classes with low or negative correlation. FX is a good example, with the old adage being true that there’s no such thing as a bear market in FX. Commodities is another space that can be viewed, with gold usually having a low/inverse correlation to stocks.
Getting access to fixed income markets can be trickier, but with US Treasuries only having a $1,000 minimum ticket size, it’s another avenue to explore for those hungry for yield/profit when the stock market is falling.
AlphaPicks owns positions in PENN, RIO and DVN. To trade shares, register here with our preferred partner, EToro.