“History doesn’t repeat itself, but it often rhymes.”
That famous Mark Twain quote may be especially appropriate in today’s market.
Over the long weekend, I dove into some deep research put together by a group of investors that I have a tremendous amount of respect for.
The special report spent a lot of time comparing our current market to other similar environments in history.
Quite frankly, I came away from the research session a bit disturbed.
Because I’m more convinced than ever that the markets carry quite a bit of risk for certain investors.
But at the same time, the research I did over the weekend made me even more confident that our strategies here at Rich Retirement Letter will help to protect you.
In fact, we’ve covered a lot of opportunities to help you grow your wealth even when other areas of the market trade lower.
Today, I want to share a bit more about how risks are accumulating in this market.
And I’ll help you put a plan in place to keep your retirement safe and healthy throughout this turbulent season.
Related: Twisted Market Logic: “Good News Is Bad News”
As Speculative Enthusiasm Picks Up, Our Spidey Sense Tingles
My phone started buzzing this morning as I began my day — and it didn’t stop!
It seems that every major news outlet was letting me know that the price of bitcoin had crossed above $50,000.
It’s a big milestone that’s catching a lot of attention in an area of the market that has a tremendous amount of speculation.
This news went right along with the report that worried me over the weekend.
In this report, there were several pieces of evidence pointing to a speculative bubble in the market.
First, the report mentioned that the put-call ratio dropped to a level not seen since the 1990s.
This ratio measures the difference between the number of investors buying put contracts (which are used to profit from stocks dropping) and investors buying call contracts (used to speculate on stocks rising).
The fact that this statistic has reached a level not seen since the height of the dot-com bubble leading up to the 2000 bear market is certainly concerning. It means too many investors are leveraging big bets on speculative stocks.
The second piece of evidence showed that the amount of short selling in the market has dropped significantly. This might sound like a good thing. After all, the entire Reddit revolution was aimed at hurting the “evil short sellers” who bet on stock prices dropping.
But it’s important to remember that the entire market is like an ecosystem. You need all different parts of this system for the market to be healthy and functional.
If you take natural predators out of a forest, you’ll soon find that there aren’t enough resources left for all of the animals in the forest. And more of those animals will die from starvation and disease.
It’s not a perfect parallel, but short-sellers play an important role in the economy and the market.
When stock prices start to drop, there’s an incentive for short sellers to step in and buy and lock in their profits.
But if these “predators” have been taken out of the market, there won’t be as much protection against swiftly falling stock prices.
And finally, we’ve seen some interesting activity this earnings season. Companies that report strong results have not been rewarded with higher stock prices.
In other words, investors have very high expectations for some of the most popular growth companies.
And even when these companies report strong earnings, investors aren’t impressed because they already knew that it was going to happen.
In this type of environment, we can often see the most popular stocks trade sharply lower. This is a situation where almost everyone interested in buying shares already made their purchases.
And without new investors stepping up to the plate to buy, shares of these stocks can naturally slide lower.
How to Profit From a Speculative Bubble Burst
Whenever a major bubble bursts in the market, there are two ways that smart investors can capitalize.
One way is very risky but can lead to big returns. The other way is much safer — and can still make a huge impact on your retirement wealth.
The first way to profit from a bubble bursting is to make bearish bets on the speculative stocks that are likely to trade lower.
In this case, it’s becoming clear that some of the most speculative tech names are at risk.
Many of these stocks have been considered “COVID trades” because the companies benefited from lockdowns, the work from home trend and some of the medical shifts that took place last year.
Speculative investors can bet against these stocks by either shorting (borrowing shares and selling them now hoping to repurchase them at a lower price later) or buying put contracts on stocks expected to trade lower. Put contracts rise in value when their underlying stock prices drop.
This is a risky approach because sometimes bubbles continue to inflate. And it can be difficult to get the timing right for when that bubble bursts.
If you take this approach and speculative stock prices continue to trade higher, you’ll likely lose money.
A second, more conservative way to profit from a bubble bursting is to figure out where the money will go as investors pull out of the speculative names.
If you buy shares of stable stocks that are seen as safe alternatives to the speculative bubble stocks, you should grow your wealth as money flows into these names.
It may sound like a boring approach, but when you see these “boring” stocks trade sharply higher, I’m confident you’ll feel some excitement.
The best stocks to benefit from a speculative bubble bursting are shares of companies that produce materials used for infrastructure projects, sell products and services internationally, or companies that will benefit from inflation like gold miners or residential real estate companies.
For weeks now, we’ve been talking about key stocks in these areas of the market. And hopefully you’ve already started building positions in these safe stocks.
A bonus is that most of these companies pay generous dividends which you can use to fund your retirement expenses or to reinvest in more shares — leading to bigger income payments and more profits in the future.
If you haven’t yet started adding these solid performers into your portfolio, I encourage you to get started as soon as possible.
While it’s difficult to predict the timing for a speculative bubble to burst, we’re starting to see warning signs.
By lightening up on speculative positions, building your “war chest” of safe investments and keeping on top of the economic trends, you’ll be in a perfect spot to build your retirement wealth and enjoy a much more reliable stream of investment profits!
Let Us Know What You Think