A Map to Turn Fear into Profit

Last Monday, I shared a chart with Money Map Report subscribers and suggested they may want to batten down the hatches because I saw a 30- to 40-point drop happening by the end of the week.

Now I want to share that same chart with you plus a new one - and encourage you to do the same thing.

The shellacking the markets took last Thursday is the most powerful warning sign we've seen yet that things are not what they seem in the financial markets. For lack of a better term, it's a bearish omen, despite Monday's recovery.

Today I want to talk about what that means for your money and what you can do about it in the name of protecting your money and, more importantly, the pursuit of profits.

Contrary to what you might believe, not all bears are bad news.

Let's start with the chart....

The Real Reason Black Monday Still Resonates So Clearly

I find the old adage that a picture is worth a thousand words is really true, especially when you look carefully at market charts over widely disparate time frames. That's because you can easily see similarities that are otherwise not apparent.

This helps you prepare ahead of time for contingencies that others will not see until it's too late.

For example, many people have convinced themselves that things are different today in our post-financial crisis world. They cite everything from the "brave new world" we live in to the "rapidly changing technology" and even the Fed's "innovative financial policies" as rationale. Things, they say, are different this time.

So why is it that today's bull market is eerily similar to another famous bull market? And why are traders worried that we'll have a repeat of Black Monday in 1987 a month from now?

Short version... because the charts point to very similar dynamics over almost identical time frames.

Even if investors don't recall the data, they recall the angst from Black Monday 27 years ago.

Psychologists say this is because of the way the amygdala works. That's the part of the brain that activates in response to emotionally charged circumstances, especially those that provoke fear.

I think it's simply the collective knowledge of one generation being passed involuntarily to the next as part of a critical survival instinct, which is why even those who were not investing then feel the fear now.

To draw a parallel, saber-toothed tigers haven't existed for more than 12,000 years. Yet, the thought of them prowling around still causes an involuntary reaction, not to mention a totally irrational "grab-your-spear-and-run-for-the-cave" reaction in most people.

The bull market that started in March 2009 is now up 169% through Friday. That's nearly step for step with the rally that began in 1982 and immediately before the biggest single-day drop in market history on Oct. 19, 1987 - a day we now refer to as "Black Monday."

Many technicians, myself included, are concerned that we could have a repeat 30 days from now.

A Tempered View of a Correction

Marc Faber, who publishes the Gloom, Boom and Doom Report, took it up a notch after last Thursday's trading, saying that he thinks stocks will "drop by 20% to 30% in the near future." With guys like that out there, who needs saber-toothed tigers?!

Anyway, don't let that put you off track. While another Black Monday is theoretically possible, the far more probable scenario is a market correction of 5% to 10%. And that's not a bad thing.

It's long overdue and would be a welcome sign that things are, in fact, working normally. People forget that nothing goes up forever. Markets have to buy and sell for there to be price discovery. Up and down is part of the process. That's why Monday's rally is only part of the story.

If you look at a chart of the S&P 500, a correction like what I am suggesting points to a drop from roughly 1850, where we are now, to approximately 1757, should we get it.

It's worth noting that in order to arrive there, the markets would have to take out key support at 1820ish before coming into contact with the 200-day moving average that, not coincidentally, is farther below.

Will we get there?

I have no idea. Nobody does. But I do know that many of the computers that account for 70% or more of the overall trading volume on today's exchanges are programmed to sell when the markets break below key support levels. Until that happens, the volatility we are experiencing right now is just statistical noise.

If this gives you pause, take a deep breath.

We have talked many times about how and why market volatility creates tremendous opportunity. I know it's not comfortable, but that's your amygdala talking again.

Logically speaking, a sizeable correction is long overdue and should be celebrated because the business cases behind many of the best companies remain intact and completely unaffected by how the stock markets move. It's your chance to buy a $50 steak at Peter Luger's in NYC at a substantial discount.

I can think of any number of reasons why.

For instance, productivity is hitting all-time highs because of technology and innovation. Businesses are cash flush with trillions of cash being put to work. Interest rates remain low - albeit totally for artificial reasons thanks to the Fed, but low nonetheless.

And globalization continues, with the benefits flowing right to the bottom line on some 60+% of the S&P 500, while also charging into economies growing at 6% to 8% a year. Those same economies are where some 75% of the world's population lives today.

Your Specific Profit Plan

Here's what I want you to do today:

Double-check your trailing stops. If the markets do continue to fall, chances are you're going to have the opportunity to capture plenty of profits just like Money Map Report subscribers have in the past. You are using them... right? (If not, click here to find out about getting a copy of the Money Map Method, where I share how to maximize profits and minimize losses using them.) If the markets continue to rise, you're going to go along for the ride and you just raise your stops to ensure you capture even larger profits, which is, after all, kinda the point. Add an inverse fund to your portfolio right now. My favorites include the Rydex Series Trust Inverse S&P 500 Strategy Fund Class Investor (MUTF: RYURX) fund or the ProShares Short S&P 500 (NYSE ARCA: SH). Both appreciate as the S&P 500 falls. Studies show that 3% to 5% of overall investable assets can provide some substantial reinforcement for your portfolio, not to mention some healthy profits, too. Get your buy list ready. If you wanted to buy Tesla Motors Inc. (Nasdaq: TSLA) at $150 or Amazon.com Inc. (Nasdaq: AMZN) at $250, you just may get your chance. Other companies may be similarly discounted - and I'll be back in subsequent columns with some names and ideas I hope you find helpful.

No investor has to suffer the ravages of a bear market if they're properly prepared.

Best regards for great investing,

Keith