Is a Market Crash Coming?

"They're bigger. Too big to fail."

This comment on the current state of banks came from Mark Mobius, chairman of the Templeton Emerging Market Group, just weeks ago.

He tells Bloomberg that we've done little to fix our financial system over the past few years. In fact, by his calculation, the value of derivatives (those notorious financial instruments that shook up the banking world just years ago) is now 10 times larger than global gross domestic product.

This is clearly a cause for concern.

Because of this risk still present in the financial system, Mobius says, "There is definitely going to be another financial crisis around the corner because we haven't solved any of the things that caused the previous crisis."

Which means that if you -- like so many of us -- were blindsided by the last market crash, this could be your chance to successfully repeat it the right way.

So how do you protect yourself?
Many observers believe that an investment in gold could be a smart way to hedge a coming market crash.

Hedge fund master John Paulson owns a sizable stake of SPDR Gold Trust (NYSE: GLD  ) , while guys like John Hussman and George Soros have also been buying top gold miners, including Barrick Gold (NYSE: ABX  ) .

These moves have worked out well for them, and many investors continue to follow their lead. In fact, despite a recent pullback in the price of gold, "investors [are] continuing to seek safe-haven investments," through similar venues, according to Citigroup analyst Jon Bergtheil.

But the fact remains -- gold is a commodity with no coupon or predictable growth rate. So making this move could prove quite risky.

You could also load up on stalwarts
When the market shows signs of weakness, many investors like to load up on blue-chip stocks. After all, their reach, stability, and frequently, their dividends help them weather the storm better than more volatile large caps.

Here's a handful of stalwarts you might want to buy, and why:

Company

Market Cap

Dividend Yield

5-Year Revenue CAGR

Strength

Abbott Laboratories (NYSE: ABT  ) $79.4 billion 3.8% 11.1% Global health-care company devoted to finding new ways to manage illness and patients. Regardless of a downturn, sick people will still bring demand.
Schlumberger (NYSE: SLB  ) $115.4 billion 1.2% 14.7% Global oilfield services giant. Even if a downturn temporarily halts rising demand for oil, the companies who drill still can't do without this giant's vital services.
Coca-Cola (NYSE: KO  ) $150.0 billion 2.9% 10.5% Global beverage giant -- loved just as much (if not more) abroad as at home in America.
America Movil (NYSE: AMX  ) $96.0 billion 1.3% 24.8% This cell phone provider has a huge global footprint, which gives it more diversity than U.S.-centric competitors.

Data from Capital IQ, a division of Standard & Poor's.

Though these are strong defensive plays, there's yet another strategy you could use to profit from a market crash -- one you probably haven't considered.

The best way for you to play a coming market crash
To profitably anticipate a market crash, consider buying put options on the S&P 500 (NYSE: SPY  ) index.

These options contracts gain in value if the market declines. When this happens, you can cash out your options contract, then use the profits made on this trade to buy stocks at depressed prices, thus helping you in two ways.

This is one of the timely options trades that Fool options experts Jeff Fischer and Jim Gillies recently recommended to bearish investors.

For a limited time, you can see all the details of their thinking in an exclusive video series for which many investors have paid nearly $1,000. This tutorial's designed for beginners and experts alike. Click here to gain access to the video, and get your hands on Jeff and Jim's proprietary options trading guide, absolutely free.

Adam J. Wiederman owns no shares of the companies mentioned above. The Motley Fool owns shares of Schlumberger, Coca-Cola, and Abbott Laboratories. Motley Fool newsletter services have recommended buying shares of Abbott Laboratories and Coca-Cola, and formerly recommended buying shares of America Movil. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (2) | Recommend This Article (13)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 13, 2011, at 5:23 PM, Borbality wrote:

    yay speculating

  • Report this Comment On June 14, 2011, at 3:39 PM, vrpirata wrote:

    Sure, jump from one bubble to another bubble (gold). Simple rules of offer and demand have disconnected gold from its real value. Too much people buying gold (demand) has disconnected it from its real intrinsic value. Gold is following exactly the same behavior as any other bubble.

    With so much cash already in the gold bubble, the first to cash out after the peak will make the biggest profits, and as people continue to cash out, the downward spiral will accelerate with much more losers than winners… as with all bubbles. Just be careful not to be the greatest fool (the last one to buy just before it crashes).

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