How to Deal With Stocks and Crypto Freefalling?

I remember vividly my first trade in stocks. This was in 2007 and I had bought shares of Citigroup. It went from $27 to $28.5 in less than a week and I thought stocks were great. Since then I have lost my last savings twice! The painful experiences I had through blowing up my account twice greatly effected how I looked at investments.

What I learned the most regarding investments is to always think long term. People who invested in stocks between 2007 thru 2009 and held to today will still be up big. One down day does not make the world end. One bear market does not mean you lose everything.

Both stocks and crypto are currently in a significant draw down. I am not too familiar with crypto trading but in stocks there are a few hints one can watch for signs of market weakness. Not this is not financial advice I am giving but from personal experiences that I picked up on.

1)

$VIX, short for volatility index is a very important number to watch. A small VIX number usually means the markets are calm while a high VIX means markets are unstable. A dummy down explanation of VIX is a measure of premium people pay to by protection from a fall or rise in stocks. Currently the VIX is almost 40. It was less than 10 last week. This kind of move is not normal. What you need to know is when ever VIX is under 10 the market is too calm to be investing fully in stocks. The reason being is when the daily VIX moves up from below 10 the % change is so significant that price premium to purchase protections rises significantly.

We basically witness such an event yesterday. Where one day move in the VIX created a lot of buyers trying to buy protection from falling stock prices. There were also market participants that took advantage of the stable downtrend of the VIX before yesterday. For simplicity sake just know there are people who lost more than 5% of which the general market drop. Much more because there where people expecting the VIX to stay low. Those investors who shorted the VIX and traders who saw the market free fall were all trying to mitigate risk buy purchasing protection. With demand out weighting supply in a single day the VIX moons. Any time VIX is above 40 is a big concern to traders. This means the markets will be very volatile.

2)

$HYG = High Yield Investment. After the great recession the return on fix income products were yielding pennies on the dollar. Some countries banks were even taking money away from customers if they held too much cash! Fix income investments are ones that provide some sort of dividend or payout after a specified term, such as certificate of deposit, a savings/checking account or bond. When investors realized the returns were small they started to invest in higher risk assets for higher returns. Remember nothing is free. There is always a risk whatever you invest in.

High yield investments have been hot for many years since the great recession. Investments that have higher returns than fix income is a good way for those who need a continuous and large cash flow such as pension funds and people who are retired and using their 401k funds. The drawback is the high yield investments also comes with risks. When prices for high yield drops it means investors are not willing to take on risk even though there is a good yield. Instead they are likely to go with more stable investments such as CDs or bonds.

When you look at the ticker symbol $HYG it represents a basket of high yield investments. $HYG has been in a downtrend for more than a month and last Friday broke a key support level. It was a sign that worse was yet to come in overall markets.

3)

$TLT = Long term bonds. Dummy down definition of a bond is a contract written by the government to borrow money. Every bond is a loan the government promises to payback at a future date with interest. The interest fluctuates on a daily basis. You may have heard about a 2 year bond and a 10 year bond and flattening of the yield curve. When the interest in the 2 and 10 year are very close to each other this is not a good sign for overall market. Why? Well because the longer a investment term should yield greater rewards, but when it does not yield greater rewards it means future outlook is uncertain. When the 2 year yield exceeds the 10 year yield this usually means the markets are unhealthy.

$TLT is a bond ETF which prices 20 year US bonds. I watch it almost weekly if not daily to see how expensive or less expensive it is for the government to borrow more money. Currently bond prices are dropping which means it is a good think for markets, however if $TLT rises it likely means investors are investing more in bonds than stocks.

What I complied here are some of the things I watch out for before I make a stock/option investment. I by no means am a financial advisor and take this post with a grain of salt as I had to lick my wounds many times.

The reason I lost so much is because I did not think about the long term. Before I blew up my account I was looking for quick 1 day gains or a few days. When ever a trade did not go my way I held far too long and sold too low from where I bought it. Many mistakes over and over again. The mental anguish and sleepless nights shorten problem a decade of my life. We are human so emotions will bound us to sometimes make poor decisions.

Money is important for certain reasons but always remember it is not the most important. More money will give greater chances of achieving happiness, but it does not mean you will achieve it. Be grateful for what you have and focus on the things you have control of such as health, spending time with family, or working more to earn more. Stocks will be here tomorrow and the next day whether it drops to zero or rises to a million. As an investor of both stocks and crypto I am holding. Not necessary buying more but not selling either.

Stay safe and do not invest in things you do not fully understand.

Thanks for reading.

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