Three Ways to Make Money off a Recession

Posted by:DKovach in Bonds, Forex, Futures, Risk Management, Stocks

The stock market has had its best January since 1987.  But we all remember what happened later in 1987…

This simple history lesson emphasizes the fact that we have had the biggest turnaround in stocks in 30 years, which is good for now.  But eventually as companies become overleveraged it will reach a breaking point, and this is when we will have our recession.  When will that happen?  Answer: Who the f$$k cares?
As traders our job is not to pontificate like the talking heads on television, our job is to make actionable decisions and manage risk.  If you tell me the recession will happen tomorrow (as I hear daily from conspiracy theorists, tinfoil-hats, and the generally paranoid), that's great.  But what does it mean for me?  Do you have a put on the S&P?  Are you long VIX derivatives?  Did you short the Dow?  Those are the questions I care about.

The data as of late suggests that the Fed is opening up the flood gates for stocks yet again.  After all, Central Bankers are still Bankers and no Financial Professional likes flaccid markets.  Of course, this is not sustainable long-term.  As traders we are not concerned with this: our job is to buy on dips.

In our community, we provide daily strategy sessions with specific levels for ideas on when and where to get in and out.  We discuss viewpoints on where to take profit, and where to get out if the trade doesn’t go your way.  Those are actionable instructions!

That being said, when the markets are puking and we are in full on bear mode, this is when you can clean up.  Here are three basic ideas for maximizing gains in a recession:

  1. Bear markets happen fast, and they are pretty easy to spot: lots of volume, slicing through levels, talking heads on the news are freaking out, etc.  From experience, you have at least 5 days to take advantage of this in various ways.  As with anything in trading, it is non-trivial.  We must watch for levels because there is obviously some retracement to be expected.
  2. If you’re thinking of investing long term, you don't really care if you're underwater for a couple of weeks.  With your portfolios, like IRAs, a barfing stock market just means stocks are on sale at a discount!  If you expect the stock market to survive and the United States to still be around, you want to use the dips to buy for the long term and hedge your short positions from day trading.
  3. A dovish Fed means rates come down or stagnate, which means you can plan to refinance your house (or buy one) or take on loans if you need to for whatever.