Do This Now as Markets Plunge

Bear Market, Corrections, Options

Today we’re featuring Tim Melvin, the newest investing expert here at Investor’s Alley, here in Options Floor Trader.

He brings 30+ years of investing experience and expertise in alternative strategies to create income and returns that don’t depend on the S&P 500 going up.

Today, as markets are falling and fear is building, he has an important message about what’s coming…

And how you can get ahead of it, protect your retirement, and even profit from it.

Here’s Tim Melvin…

Roaring bear in front of red stock chart

The market’s rapid decline these past couple of weeks has caught a lot of people off guard.

The markets have been singing the same song for so long that it was easy to ignore what was actually happening in the world. The technology stocks have dominated things for so long that most people came into 2022 thinking that if they continued to do the same things they have been doing, they would continue to make money.

It has always been this way. Everyone expects current conditions to keep repeating themselves. But unfortunately, when conditions inevitably reverse, there is a tendency to stay in denial for too long.

I have often seen investors stay so long that they give back most, if not all, of what they made when markets were playing out as they expected.

The worst possible outcome is staying too long and selling at the bottom as fear peaks.

Because let’s face it: conditions have changed.

We have an all-out war between major powers in Europe for the first time since 1945. Every day we dance on the edge of World War III as the West tries to support Ukraine without provoking a militaristic reply from Russia.

For the first time since 1972, a Chairman of the Federal Reserve decided he could let the inflation dragon out of the cage to help boost the economy.

It didn’t work then, and it has not worked now. Inflation is currently running at a 40-year high with no sign of stopping. As a result, the Fed will have to raise rates for the rest of this year and well into next to get inflation back under the target of 2%.

We can have a long talk at some point in the future about the poor energy policies, mistakes made by politicians and central bankers, and the social and demographic trends that made this sell-off inevitable.

But the question now is what to do today.

Depending on your risk tolerance and investing goals, the answer may be nothing.

If you got caught long and have seen your stocks fall along with the markets, do not panic and be the person that sells into a falling market. Bear markets always end and recover.

Go through your portfolio and evaluate every position:

  • Do you love the company?
  • Is management shareholder-friendly with rising dividends and a record of buybacks at reasonable prices?
  • Are the price-to-earnings, cash flow, and sales ratios at reasonable levels?
  • Can the business survive a severe recession, or are they overloaded with debt and operating losses?

If you love it and the business can survive, set a level where you will buy more.

If you don’t love it or it’s grossly overvalued, sell it and look for other opportunities.

Because there are other opportunities worth pursuing right now as prices fall.

I will start, as I usually do, with bank stocks. The banking system is in better shape than it has ever been. Banks have been selling off with the market and are selling at the lowest price-to-earnings ratio in years. As a result, we can buy high-quality banks at very low valuations at the moment that are yielding 4%, 5%, and higher.

Best of all, the banks I prefer are not in the indexes and so do not see the indiscriminate institutional selling we often see from indexed stocks when markets turn sour.

When markets turn back up, these super-strong high-yielding banks will surge, leading the market indexes back to new highs. In the meantime, we will be collecting big dividends to add cash to our accounts.

I also love special situations with the potential for high returns no matter what the stock market is doing at a given moment in time. I am a huge fan right now of busted deal stocks where mergers have fallen apart for reasons unrelated to company fundamentals. For instance, a sporting goods company merger failed because the Department of Justice had antitrust concerns.

This target company is a growing business with excellent finances, trading at half the proposed merger price and less than four times earnings. I can buy the stock outright with a high degree of confidence that the stock will eventually recover, or a private equity firm with no antitrust issues will scoop the company up at a massive premium to its current price.

But I know Option Floor Trader readers are all about options. Well, if I am more interested in collection option premiums, I can sell a cash-secured three-month put option that gives me an annualized 40% cash return.

There are also opportunities to buy closed-end funds that will benefit from continued high inflation at 15% or more, at prices lower than the value of the stocks and bonds they own. These funds also pay big dividends of 7&, 8%, and more right now.

For example, the US dollar has been on a tear of late, rising 15% over a basket of foreign currencies over the past year. Eventually, that will turn around, and right now, we can buy a closed-end fund yielding over 10% that could rise by as much as 35% when that happens.

The total return potential of these inflation exploitation opportunities is staggering.

The markets have been ugly and may get uglier in the weeks and months ahead. First, sell any overleveraged, overvalued stock that you do not love. Then, decide where you want to buy more and put the orders in now.

Look for special situations that can provide income and gains no matter what the market does for the rest of 2022.

I have been helping clients and investors do this for decades now, and I can help you do the same. Stay tuned for more on that, because I’m preparing something special for you right now…

To learn more about Tim Melvin and his unique investing approach, read his recent article here.