Profiting Amid the Market Drop with Defensive ETFs and Call Options

Chris Versace

Chris Versace is a financial columnist and equity analyst with more than 20 years of experience in the investment industry.

To say the stock market has started the year on a rocky note is a bit of an understatement. Some might chalk things up to the leading cause — the lack of a Santa Claus rally at the end of 2015 going into 2016 (given the 2.3% drop in the S&P 500 from Christmas Eve through Jan. 5). But from my perspective, the market once again has been hit by what we would call a healthy dose of reality with more than a sprinkling of uncertainty.

Advertisement.

The drivers behind the market move lower included a big dose of uncertainty following North Korea’s latest nuclear bomb test early last week. Also, there have been the latest go-rounds between Saudi Arabia and Iran that have, more than likely, extinguished any chance of these two major producers working together to cut production amid the growing oil supply glut. And of course there are renewed concerns about the growth of the global economy. The net effect of these factors was a 6% drop in the S&P 500 for the week, marking the worst start of a new year since 1928.

Adding to this mix, December PMI and other data published early last week from ISM and Markit Economics echo what I’ve been seeing in the monthly truck tonnage (down 0.9% month over month in November) and monthly rail carload traffic (down 15.6% year over year in December). Those readings follow a slowing domestic U.S. economy and continued contraction in China’s economy. From my perspective, this situation led to a very unsurprising cut by Deutsche Bank in its gross domestic product (GDP) growth forecast for 4Q 2015 and 1Q 2016. The firm now has its GDP forecast for 4Q 2015 at 0.5% growth, down from 1.5%, and its revised take on GDP growth in the current quarter to 1.5%, down from 2%.

Candidly, I expect to have more to follow as recent data get digested. The World Bank recently cut its outlook for China’s growth in 2016 to 6.7% from 7% in June, and expects Brazil’s economy to shrink 2.5% and Russia’s to contract 0.7% this year. Meanwhile, the World Bank also has reduced its 2016 global growth forecast to 2.9% from 3.3% in June, which helps explain the demand side of the equation for falling commodity prices. I’m keeping tabs on commodities, such as copper and steel, which could be a leading indicator of a pick-up in the global economy.

Advertisement.

The growing amount of data I’ve been seeing during the last few months points to a mismatch between the slowing global economy and earnings expectations for the coming year. As I have shared previously, I do not see how the S&P 500 group of companies will jump-start earnings to match the current consensus expectation of 7.5% annual growth in 2016 vs. 1.1% in 2015. These and other concerns led me to recommend the ProShares Short S&P 500 ETF and subsequently the corresponding SH February $22 calls to subscribers of my Power ETF Trader service in mid-December 2015. As I write this update, that ETF has returned more than 3% and the and the SH February $22 calls are up 10% compared to the 4.3% drop in the S&P 500 over the last month.

As we head into the December-quarter earnings season, I expect to see the above confluence of factors result in more companies offering cautious outlooks than prognosticating robust growth. These are just more reasons to tread carefully in the near future, given that we see the fallout resulting in downward earnings revisions for the S&P 500.

S&P 500 EARNINGS 01082016 (1)

Exactly how low those earnings expectations will go remains to be seen, but what it means is that we are likely in for more turbulent times as this re-setting occurs. We’re already starting to see more of that, as Goldman Sachs (GS) lowered its 2016 earnings forecast for the S&P 500 to $117 per share vs. the $127.05 per share figure published by FactSet at the end of 2015.

Advertisement.

When these revisions happen, it tends to be less than pleasant. In all likelihood, it means the market will trade sideways or further downward until all the “bad news” is digested. While the S&P’s forward multiple has fallen a few points to 15.2x, amid the arguably lofty 2016 earnings expectations we discussed the reality is that downward revisions are likely to boost the forward multiple back up over 16x, alongside slow-to-none earnings growth.

To me and to subscribers to my long-only investing newsletter Growth & Dividend Report, this means we will continue to be prudent as we navigate the upcoming earnings season, which will pick up substantially in the coming days.

On the one hand, it’s better to keep our powder dry and strike when the time is right than look to be a hero and buy before the market storm gives way to a discernible path ahead. On the other, we are starting to see quite a few quality companies on sale, more than a few with strong growth prospects ahead and others that fall into one of my favorite investing categories — dividend dynamos. Join my other subscribers in finding out which stocks we’re looking to add next by clicking here.

In case you missed it, I encourage you to read my e-letter column from last week about the buying opportunities the current market situation is creating. I also invite you to comment in the space provided below.

Upcoming Appearances

Advertisement.
  • Each Monday, I join Sonoma County’s Morning News with Melanie Morgan’s “Big Story” of the week to talk about the latest in the economy, stock market and more.
  • Each Friday, I join Matt Ray, the host of America’s Morning News, to talk about the latest on the economy, stock market and more. With the show broadcast in more than 170 markets, be sure to tune in.

share on:

Like This Article?
Now Get Mark's FREE Special Report:
3 Dividend Plays with Sky-High Returns

This newly-released report by a top-20 living economist details three investments that are your best bets for income and appreciation for the rest of the year and beyond.

Get Access to the Report, 100% FREE


img
share on:

PREMIUM SERVICES FOR INVESTORS

Dr. Mark Skousen

Named one of the "Top 20 Living Economists," Dr. Skousen is a professional economist, investment expert, university professor, and author of more than 25 books.

Product Details

  • Forecasts & Strategies
  • Home Run Trader
  • Fast Money Alert
  • Five Star Trader
  • TNT Trader
LEARN MORE HERE

Bryan Perry

A former Wall Street financial advisor with three decades' experience, Bryan Perry focuses his efforts on high-yield income investing and quick-hitting options plays.

Product Details

  • Cash Machine
  • Premium Income PRO (exclusively for subscribers of Cash Machine)
  • Quick Income Trader
  • Breakout Options Alert
  • Hi-Tech Trader
LEARN MORE HERE

Jim Woods

Jim Woods has over 20 years of experience in the markets from working as a stockbroker,
financial journalist, and money manager. As well as a book author and regular contributor to
numerous investment websites, Jim is the editor of:

Product Details

  • Successful Investing
  • High Velocity Options
  • Intelligence Report
  • Bullseye Stock Trader
  • Eagle Eye Opener
LEARN MORE HERE

Bob Carlson

Bob Carlson provides independent, objective research covering all the financial issues of retirement and retirement planning. In addition, Bob serves as Chairman of the Board of Trustees of the Fairfax County (VA) Employees’ Retirement System, which has over $2.8 billion in assets.

Product Details

  • Retirement Watch
  • Retirement Watch Spotlight Series
  • Lifetime Retirement Protection Program
LEARN MORE HERE

Jon Johnson

Jon Johnson's philosophy in investing and trading is to take what the market gives you regardless if that is to the upside or downside. For the past 21 years, Jon has helped thousands of clients gain success in the financial markets through his newsletters and education services:

Product Details

  • Investment House Daily
  • Stock of the Week
  • Technical Traders Alert
  • Rapid Profits Stock Trader
LEARN MORE HERE

DividendInvestor.com

Used by financial advisors and individual investors all over the world, DividendInvestor.com is the premier provider and one-stop shop for dividend information and research.

Product Details

Popular tools include our proprietary Dividend Calendar, Dividend Calculator, Dividend Score Card, and many more.

  • Dividend Investor
LEARN MORE HERE

George Gilder

George Gilder is the most knowledgeable man in America when it comes to the future of technology and its impact on our lives.  He’s an established investor, bestselling author, and economist with an uncanny ability to foresee how new breakthroughs will play out, years in advance.

Product Details

  • Technology Report
  • Technology Report PRO
  • Moonshots
  • Private Reserve
  • Millionaire Circle
LEARN MORE HERE

DayTradeSPY

DayTradeSPY was founded by head trader Hugh Grossman, a retired internal auditor for a Fortune 500 company. After years of first-hand experience trying out one trading strategy after another, Hugh instead developed his own trading system centered around day trading SPY options. That’s it... Nothing else.

Product Details

  • Trading Room
  • Pick of the Day
  • Inner Circle
  • Online Workshops
LEARN MORE HERE