Market Lab Report - How to identify when the next crash will come

Published : July 18 2016 at 8:53 ET

Trying to predict the future is futile and runs counter to making money in the markets. Our pledge to our members has always been to stay focused on the markets in real-time, running our screens, and watching for subtle changes in stocks so potential long and short positions reveal themselves at the right time. This enables us to make money NOW. The present is all that matters.

That said, it has not stopped investors from asking us how to identify the next great crash. With all the social unrest and global mayhem on a steep rise, this is completely understandable. Our answer is that, based on more than 100 years of market history and roughly a quarter century of trading in real-time with actual capital, the market *always* reveals cracks. So by staying focused in the now, such cracks have taken us out of our long positions and into cash or the short side, shortly before the market underwent any major correction.

In real-time trading over the last quarter century, we both avoided the summer correction of 1996, the Asian contagion of late 1997, the long term capital disaster of late 1998, and stayed mostly out of long positions between March 2000 and early 2003. This was verified by KPMG, the big-four auditor, and Rothstein-Kass, the respected firm known for its hedge fund audits. Since then, we have avoided the crash of 2008, the flash crash of 2010, the bond downgrade correction of 2011, and more recently the Jan-Feb correction of 2016. 

It's not magic nor coincidence. It was not coincidence that *all* of William O'Neils hand-picked traders in March 2000 exited to cash within days of the March market top. Each trader was highly competitive so did not share their trading moves with others, so this "coincidence" could not be due to any sharing of information.

Simply, the signs were there as they always seem to be. This is how our stock picking operates. This is how the Market Direction Model (MDM) and now the VIX Volatility Model (VVM) operate. And corrections have always brought good profits to both models. The 2010 and 2011 corrections were profitable blessings. And the correction in Jan-Feb this year was of great benefit to the VVM: 

So when cracks emerge again, the VVM which is a highly sensitive strategy will move to a buy signal (buying volatility), and the MDM will move to a sell signal. 

We have no idea if the cracks will just be surface cracks or break wide open into something far worse, but we will be well-positioned for whatever does occur.

This information is provided by Virtue of Selfish Investing, LLC (VoSI) is issued solely for informational purposes and does not constitute an offer to sell or a solicitation of an offer to buy securities. Information contained herein is based on sources which we believe to be reliable but is not guaranteed by us as being accurate and does not purport to be a complete statement or summary of available data. VoSI reports are intended to alert VoSI members to technical developments in certain securities that may or may not be actionable, only, and are not intended as recommendations. Past performance is not a guarantee, nor is it necessarily indicative, of future results. Opinions expressed herein are statements of our judgment as of the publication date and are subject to change without notice. Entities including but not limited to VoSI, its members, officers, directors, employees, customers, agents, and affiliates may have a position, long or short, in the securities referred to herein, and/or other related securities, and may increase or decrease such position or take a contra position. Additional information is available upon written request. This publication is for clients of Virtue of Selfish Investing, LLC. Reproduction without written permission is strictly prohibited and will be prosecuted to the full extent of the law. ©2016 Virtue of Selfish Investing, LLC. All rights reserved.