How to profit from European trouble

The current market conditions we are all facing are very turbulent.  A single headline out of Europe can spark a massive sell off or a massive rally.  No investor feels safe with his or her money invested in these unpredictable conditions.  Many have decided to take their money out of equities in an attempt to wait for the market to bottom out; allowing them to purchase high quality stock at a very cheap price.  While this seems like a solid strategy fundamentally, in reality it may not be so lucrative.  This is due to the fact that the market is not headed for an objective bottom.  Following the market crash in 2008, many smart investors took advantage of the rock bottom stock prices and raked in a killing during 2009 and 2010.  While on the surface this situation appears to be similar, it most certainly is not.  The current market struggles we are facing are all based on speculation, not actual fact.  In 2008, Lehman Brothers collapsed sending the markets into free fall.  Today's market is struggling because investors are selling stock on the assumption that the European debt crisis will collapse and hurt the world economy.  It should be apparent now that the two situations are completely different.  After the 2008 crash, every large cap company was a value buy.  But right now there are many pit falls for the trigger happy investor.

Please do not misinterpret the intent of this article.  Everything I just explained may lead you to think the current market is too dangerous to invest in and should be left alone.  On the contrary, there are 2 very profitable opportunities available and I will discuss them below.

1.       Watching the VIX (Volatility Index)

The VIX (Volatility Index) is a beautiful way to track the way investors are feeling about Europe.  Often referred to as the Fear Index, the VIX goes up when people sell large amounts of stock, and down when people purchase large amounts of stock.  Whenever the VIX breaks 36, there is a large rally the next day.  This is true roughly 99 out of 100 times.  36 is fundamentally a level that is unsustainable by investors unless Europe actually does default (extremely unlikely).  A good amount of profit can be generated by simply buying a few stable stocks, such as General Electric, Exxon-Mobil, Halliburton, Berkshire Hathaway, etc., and selling them at the end of the next day.

2.      Buying stock in the U.S. banks

The few stocks that are actually guaranteed value buys are the large U.S. banks.  Many of them have fallen to low prices that are based on nothing but rumor and paranoia.  Many believe that if Europe defaults, the U.S. banks would suffer because of their exposure to sovereign debt.  In actuality, the exposure that U.S. banks have to sovereign debt is extremely small and would not greatly affect their equity holdings.  On top of that, their earnings are completely healthy, and their P/E ratios are lower than they have been in decades.  Buying a large diversity of U.S. banks such as J.P. Morgan-Chase, Goldman Sachs, Bank of America, Wells Fargo, and Morgan Stanley will definitely yield extremely high returns for the next two years or so.

The two profitable opportunities mentioned above are some of the only methods that can work consistently in the current market storm.  Between following the VIX and investing in underpriced banks, any investor can continue to grow their wealth in a healthy manner.