Another way to play a potential stock market crash is to short some of the most popular high-priced momentum stocks. The reason that these stocks make such great shorts during a crash is because so much hot hedge fund money is in these names that when they sell, the declines will come "fast and furious."
Keep in mind that the market won't care about the fundamentals of these stocks if a crash comes. Hedge fund managers will only want one thing, and that is to go to cash and to protect their profits in these stocks. Also, I would anticipate the high-frequency traders to come after many of these names with well-placed computer algorithm sell programs.
Some of the names I would consider are
Chipotle Mexican Grill
Goldman Sachs Group
Some other lower-priced momentum names that could see very sharp drops include
Green Mountain Coffee Roasters
Again, I think the best way to play the short side is to use put options rather than to short these stocks outright. With put options, you can limit your short exposure, because you'll know exactly how much capital you have at risk. If you think a market crash is on the horizon in the next couple of months, or even sooner, I think the abovementioned names should be on your short radar.
Finally, a more conservative way to avoid a stock market crash is to simply move your stock allocations into cash. Remember, if the crash doesn't happen, you can always buy back into the market at anytime. And if the crash does happen, then you will have a war chest ready to buy back stocks at bargain basement prices.
All of this is not to say I'm calling for or predicting a market crash. I'm simply pointing out some of the technical warning signs -- and some of the ways to play a crash if the price action confirms that a major drop is knocking on the market's door.
To see more market crash plays, including
ProShares UltraPro Short Russell 2000 ETF
ProShares UltraPro Short S&P MidCap 400 ETF
, check out the
Top Stock Market Crash Plays
portfolio on Stockpickr.
-- Written by Roberto Pedone in Winderemere, Fla.
Follow Stockpickr on
and become a fan on