No matter how you look at it, the Fed is well on its way to completing a new tightening cycle, which doesn’t end well for the markets. After all, the reality is that the Fed has preceded every modern market crash with a tightening cycle.
- It did so prior to the Asian currency crisis in the late ’90s.
- The Fed tightened just before the dot-com bubble exploded in 2000.
- It hiked rates ahead of the global recession of 2008 and
- now it has hiked rates yet again.
I wonder how it will end. Perhaps with yet another stock market crash.
By Chad Shoop (thesovereigninvestor.com)
The Three Steps and a Stumble Rule
Edson Gould, an economist from the 1960s and 1970s, theorized that stocks, in general, decline (stumble) after three consecutive interest-rate hikes (three steps) by the Federal Reserve.
I may be jumping the gun a bit by bringing this up now, but it’s important to note that the Fed believes it is on track to raise rates at least three more times in 2016, which would mean we could cross the “three steps” threshold in just a matter of months.
This is your early warning sign that danger is just around the corner. A tightening cycle by the Fed does one thing every time: slow our economy and end up in a stock market crash. History tells us this and if you haven’t taken action yet, you may be running out of time…
Here’s what you can do to protect yourself:
Step 1: Lower your exposure
It’s that easy. Take some cash; park it in a bank CD. Not for yield per se, just for protection that pays a tad bit more than stuffing it under your mattress.
Step 2: Be Diversified
Make sure whatever you are holding is diversified – for industry as well as direction of the market…
Step 3: Sit idle
Markets are going to be volatile. There will be times it looks like the market will go higher forever, but it can’t … and won’t. Don’t go all in. Maintain your short exposure. Same goes for a market dip. Don’t dump your long-term holdings. Strong stable stocks that you plan on holding for years can weather the downturn. You will have paper losses, but your short exposure should offset that.
Step 4: Wait for a bottom
Of course, predicting a bottom is impossible. Pundits will always try to call it, and it might be on their sixth, seventh or eighth try before they get it right so wait for the market to actually form a bottom and start to head higher. Then ease back in with some of the cash you are parking on the sidelines today.
That’s it. These are your four steps to offset a market crash.
[The original article was written by Chad Shoop (thesovereigninvestor.com) and is presented here by the editorial team of munKNEE.com (Your Key to Making Money!) and the FREE Market Intelligence Report newsletter (see sample here – sign up in the top right corner) in a slightly edited ([ ]) and abridged (…) format to provide a fast and easy read.]
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