Global markets are under serious pressure on Monday because Chinese stocks melted lower overnight after traders reacted badly to poor December Manufacturing PMI data and currency volatility. They closed the day early with a 7% loss after hitting new circuit breaker rules.
The Dow Jones Industrial Average lost more than 400 points at its lows to test the 17,000 level for the first time since October.
As traders returned to work, a long list of concerns was waiting for them, including the specter of additional Federal Reserve interest rate hikes, falling corporate profitability, slowing U.S. economic data, crumbling energy prices and more.
Adding to the worries are new tensions between Iran and Saudi Arabia after Riyadh executed a well-known Shia cleric resulted in the burning of the Saudi embassy in Tehran. Saudi Arabia responded by cutting diplomatic ties.
The selloff is creating a number of attractive opportunities on the short side of the market, many of which my clients are already trading. Here are four to check out.
Long Volatility: iPath S&P 500 Short-Term VIX (NYSEARCA:VXX)
One of the best ways to play the selloff in the stock market is via the CBOE Volatility Index (VIX) — which, in turn, reflects the cost of put option protection against a selloff — with the iPath S&P 500 Short-Term VIX (VXX).
For years, the VIX was slammed lower as the Fed’s easy money policies kept a lid on volatility and kept stock prices marching higher. But now, as the first tightening campaign in more than a decade gets underway, volatility is lifting. The VIX has been in a pattern of higher lows since bottoming in August on the context of an even larger pattern of higher lows that started in the summer of 2014.
That’s lifted the VXX to a gain of about 14% for Edge subscribers since the position was added on Nov. 9.
Long Precious Metals: Barrick Gold Corporation (NYSE:ABX)
With risk appetites waning as the search for safe haven increases, gold and silver and the related mining stocks are enjoying a lift after months in the penalty box.
Included on the list is Barrick Gold (ABX), which looks ready to exit the long consolidation range going back to July.
The stock is up 4.7% for Edge subscribers so far this month.
Short Big-Tech Momentum: Apple Inc. (NASDAQ:AAPL)
Big tech stocks like Apple (AAPL) have been the last bastions of hope for the bulls, as measures of market breadth — or the number of stocks participating to the upside — have been deteriorating for months.
Weighed down by concerns over sales in China, saturation of the smartphone market and supply chain slowdowns for the iPhone, AAPL shares dropped out of a post-August uptrend a few weeks ago and have been on the path downwards ever since and into this selloff.
The January $116 puts recommended to Edge Pro subscribers were trimmed for a 160% gain Monday morning after they were first recommended on Dec. 17.
Short Big Banks: Bank of America Corp (NYSE:BAC)
Big banks stocks are another vulnerable area of the market, threatened by a loss of revenue from equity trading as well as their fixed income, commodities and currencies divisions.
Bank of America (BAC) is a perfect example, on the slide after hitting resistance from its July high and now dropping back below its 200-day moving average.
The January $17 puts recommended to Edge Pro subscribers are now up more than 130%.
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