The Real Reason for the Market’s Pullback

Managing Editor’s Note: Today, we’re handing the reins over to colleague Larry Benedict – a market wizard and legendary hedge fund manager.

As you’ve no doubt seen, the markets have been haywire this past week. The S&P 500 dropped 7.3% in just three days. And the tech-heavy Nasdaq fell 11.5% over the same time frame. Then on Thursday, all three major indexes soared, giving the S&P 500 its best day since 2022.

But amid the carnage and confusion, Larry’s paid subscribers have been making gains.

As volatility picked up, Larry has been able to close out gains of 131.5% by profiting on a falling Nasdaq… 121.4% on Apple’s decline… and 54.4% as Tesla tanked.

How does Larry do it?

Editorial director Chris Lowe sat down with Larry to find out. It’s all in the Q&A below.

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Chris Lowe: We just went through one of the biggest drops for stocks since the dark days of 2022.

Peak to trough, the S&P 500 fell 7.3% in just three days. The tech-laden Nasdaq plunged as much as 11.5% over the same time frame. We also saw a spike in Wall Street’s “fear gauge,” the VIX.

You’ve been glued to what’s been going on. You’ve also been closing out a string of double- and triple-digit gains for your subscribers. So, I wanted to get your insights.

The mainstream press claims this is a reaction to recession news… or the elections. But you have a different view.

Larry Benedict: I’ve been saying this for months. Stock market valuations are too high, especially on mega-cap tech.

Recent market darling Nvidia (NVDA), for example, traded as high as 78 times earnings. That means investors are paying $78 for each $1 of earnings the company is making. It takes an awful lot of growth for that kind of valuation to make sense. 

And tech stocks have been rocket rides this year. Nvidia rose as much as 181%. And the Nasdaq was up 26% for the year. So, they were ripe for a pullback.

But the immediate cause was gyrations in the Japanese yen… and the unwinding of the yen financing trade.

Chris: For folks who aren’t familiar with how that works, can you explain what the connection is between the yen and U.S. stocks?

Larry: What happened was the Japanese yen traded down to about 142 to 162 versus the dollar, which is very unstable. To stop the fall, the Japanese central bank hiked yen interest rates. And that’s bad news for anyone involved in the yen financing trade.

That’s when investors borrow in yen at ultra-low rates and invest in assets with higher returns, such as U.S. stocks and bonds.

The sudden rise in the yen meant the cost of repaying yen-denominated loans soared in U.S. dollar terms. This triggered margin calls and a mass unwinding of positions•.

Chris: What did you make of the big spike in volatility? On Monday, the VIX rose more than 30 points in a day.

Larry: It was certainly a big move. But I was on the floor of the Chicago Board Options Exchange during the Black Monday crash in 1987. And this is nothing compared with back then. Volatility got into the thousands on Black Monday. It was unbelievable.

Chris: It’s hard for a lot of buy-and-hold-type investors to understand. But as a trader, you tend to make your biggest gains when volatility is high.

Just this past week, you closed out gains of 131% by profiting on a falling Nasdaq… 121% on Apple’s decline… and 54% as Tesla tanked. Talk to me about how you turned falling stocks into winning trades.

Larry: I was recommending buying put options on mega-cap tech stocks. These pay off as stocks fall.

As we discussed, I thought valuations were really high and that these stocks were priced for perfection. Then, in middle of July, I saw something that I hadn’t seen in the 40 years I’ve been trading.

We had a day where the Russell 2000 Index of small-cap stocks and the Dow industrials stocks outperformed the tech-heavy Nasdaq by 5% in a day. That was a red flag for me. It made me think that capital is coming out of Big Tech and going into other kinds of stocks.

Now, I was early to the party. I recommended these bearish trades in July. But as volatility spikes and investors get worried about further price falls, they become desperate for put options to hedge against their bullish positions.

This blew these options up to prices that were so favorable that I recommended my readers close these trades and take their gains. And that worked out well. As you pointed out, we were able to make some very nice gains in a short amount of time.

Chris: What would you say to folks now? Are we out of the woods? Or do you see more price falls on the way?

Larry: My thesis remains the same. In the coming months, we’re going to see a lot more volatility. And we’re going to have a lot more opportunities to trade this volatility for profits.

There are times when we’re in a raging bull market. And there are times where the market looks skittish. And right now, we’re in a skittish market.

That’s great for me and my subscribers. In the last 10 years, there have been few opportunities to trade this kind of skittishness. But I believe that’s where we are now. I wouldn’t be at all surprised to see the S&P 500 and the Nasdaq down for the year.

I don’t know if it’s going to be caused by geopolitical events, or the elections, or a recession. What I do know is that there are a bunch of potential catalysts out there. So, I’ll be looking to place more bearish trades as we head into the back end of the year.