Financial Advice for a Stock Market Crash

Okay, I'm not a pessimist but how can a person with any common sense think that there really is a bunch of green shots coming out? The way I look at it there are three possible outcomes over the next eight weeks:

• Things will continue to go up (stock market)
• Things will stay the same
• Things will get worse

They don't call me a rocket scientist for nothing you know! So let me give some common sense financial advise on what to do to prepare for what may happen. The first bit of advise look at what those with money are doing.

I have linked to a three minute video that is well worth watching. Notice the amount of Insider Selling. Insider selling is when a Corporate CEO or other controlling person sells the stocks of their own company. Let's pick on Bill Gates since I am sure everyone knows who he is. When Bill Gates buys or sells any Microsoft stock he has to report to the SEC. This becomes public information. What's so important about this?

Well who knows better what a corporate stock is going to do then those who run the company? If all the big wigs are buying up every share that is available of the company they run there is probably good reason to think that they probably know something. But what if the big wigs are dumping all the shares faster then Niagara Falls dumps water then we who are looking to protect our investments might give heed.

Okay, so all the big wigs are dumping their shares like crazy. Common Sense tells me that maybe the market is WAY over valued, maybe the conditions of our economy is not as good as everyone likes to talk, and just maybe I ought to wise up and do something.

Back to my three possible scenarios, let's consider all three and apply some financial advise to the analysis:

Things Will Continue To Go UP

Okay it's possible, but if you consider the run up over the last several weeks how can we continue to run up at the pace we've seen?

Just in a common sense approach considering the high unemployment, drastic drop in GDP, number of foreclosures, number of (and pending) bank closures, and the current number of mortgages that are delinquent common sense tells me that there is not enough cash flowing into the markets to continue to ramp it up.

On top of that TrimTabs' CEO Charles Biderman states that there has been massive insider selling. He states that, "Insider selling is 30 times insider buying, while corporate stock buybacks are non-existent." Come on, companies are saying that they don't want to touch their own stocks.

So even if things continue to go up my common sense tells me that it just might be better to be playing it safe for right now and look at how I can protect what I have.

In a worst case scenario, all I will lose is some gains and they would probably be small over the next couple of months.

Things Will Continue To Be The Same

Okay, this is an easy one from a common sense point of view. If the market just kind of hovers in the same range that it is in right now, then it really doesn't matter if I am in the market or out of the market.

Considering the possibility of a stock market crash the benefits of a sideways market is not very appealing. As Mr. Biderman points out, we have been in a greed cycle. When the fear cycle kicks in the market will react.

The Market Goes Down

What if the Insider Sellers actually know something we don't? Remember the fall of 2008? What if the market does the same, not quite so bad, or even does worse? Do you want to be in it?

How important is your financial security? I know that we have been told that in the long run the market always goes up so we should just buy and hold, but the Insider Sellers are not thinking this way.

Many buy consistently every money so that they capture the highs and the lows and in the end you end up with a lower average cost then trying to time the market. Well a simple question would be, "Have you fully recovered from last years drop?"

Common Sense Financial Advise

From my point of view (of course my opinion and $2.30 will buy you an Americano at Starbucks) it is a safe bet to get out of the market. What exactly does that mean?

Well if you have an Mutual Fund, IRA, self directed 401K then call them up and tell them that you want to move your holdings into a "cash" position. Every fund has a Money Market Account or something equivalent. You won't earn much interest on it, but just set it there for about 8 -12 weeks. Worst case scenario is that the market through it's ups and downs may be a little higher and you lost a couple of points.

If you own shares of stock outright either sell them or if they are a stock that you want to keep then buy some PUT options as an insurance policy. If the stock goes down the value of the PUT will increase protecting you from loss. You can sell the PUT Options when the market is low capturing the increase value and you still own your stock and can wait for it to rise again. I know it cost money to do this, but just think of it like car insurance. It is there for protection. I would look for an option that has an expiration date into next year. You would pay a little extra for the time premium, but at least you will have time to see what the markets will do without having to run up to the expiration date. The last few weeks are a killer on the time value.

But if there is a Stock Market Crash, if the Insider Selling is a forecast to something, if you are interested in your financial security then just get in a safe place and see if anything is going to happen.

Toward the end of the video Biderman states that the markets are WAY over-priced from the greed cycle of this past summer and then says, "When the fear cycle hits, who knows?"

The market will come back, it always does. Real Estate values will come back they always do. I don't believe that it is the end of America, but when you do a thorough study of the market you have to realize that there is some very concerning reports that has the possibility of making a stock market crash. If it does it is not a roller coaster ride that you want to be on.

I am NOT a licensed investment advisor, CPA, EA, Stock Broker, Real Estate agent or broker. I don't have a Phd in economics, I was not considered for any positions as an economic adviser (or Czar) for the Obama Administration or the Bush Administration. I don't teach at Harvard, Princeton, or even the local Junior College. In fact, if you could have seen this blog before spell check you may have wondered if I went to High School. As I said in the blog my opinion and $2.30 may get you an Americano at Starbucks. This blog is just a perspective from my common sense and you should seek investment advise from a professional (even though most don't know what they are doing) before you make any financial decisions.