Naturally, with the current stock market environment, investors are concerned. Why? The S&P 500 has dropped 5.17% from its all-time highs to the low on Tuesday.
Although stock market drops are usually faster than stock market rallies, the two weeks it took to drop this far are a little slower than average for a bearish move. This indicates that although sentiment is negative, there isn’t any panic.
Is the decline related to the Fed raising rates, rising inflation, the Omicron variant causing work and school outages, or is this a natural retracement following a rally? Although this is probably a combination of all four factors, the connection with the Fed is tough to ignore.
More and more, this is starting to feel like last September when concerns about the Fed were driving long-term rates higher very quickly. Like it did last fall, the yield on the 10-year treasury has jumped nearly 10% since Friday… which is cause for concern.
However, we’re not worried; as we have said many times over the last few weeks, bear markets are scarce when earnings growth rates are still positive. Now that we have a few more reports under our belt, the early fourth-quarter reports look good, although there have been a few misses that were disruptive — like JPMorgan Chase & Co. (NYSE:JPM), The Goldman Sachs Group (NYSE:GS), etc.).
Stock market volatility is high, which isn’t unusual for earnings season, but the pace of rising rates has made traders a bit more bearish than usual.
As long as earnings continue to look positive, we will watch the stock market indices’ technical levels to confirm that a bounce is coming before the end of the month.
Trading Opportunities for This Week
The weekly unemployment claims numbers are usually not worth paying much attention to. The data is noisy and does not have a good correlation with the stock market. However, the exception to that rule is when the number of new claims of unemployment is unusually high.
Wednesday’s weekly unemployment claims release isn’t as shocking as the levels of the pandemic, but it was a big jump up from 230K new claims last week to 286K claims this week. This is not good news, but it should add weight to our view that the stock market is nearing support.
Traders are trying to price in the effect of the Fed tapering its bond-purchase program and its plans to raise the overnight rate this year. We think traders have probably overshot the impact, and long-term rates are likely to consolidate or fall in February. What may help that happen is if traders see this week’s unemployment claims numbers as an incentive for the Fed to be more patient with its tightening plans.
The old “bad news is good news” phenomenon isn’t a new idea; we have seen this play out many times over the last few years. At this point, it is still speculation, but we wouldn’t be surprised at all if the stock market popped up this week because of the bad news rather than in spite of it.
Moreover, rising Treasury yields have been pushing a lot of stocks lower this week, but we’ve got two stocks in our portfolio that are seeing big bounces this week.
This provides an excellent opportunity to sell covered calls against them. Call options increase in value when the underlying stock is rising, so by selling covered calls when the underlying stock is rising, you guarantee you’re going to bring in more income than if you sell the covered calls when the underlying stock is falling.
Could this be behind the next wave of millionaires?
We targeted two plays with this approach — and it’s not the first time we’ve done so.
As you can see from the chart below, we’ve had overarching success with plays like these… so we’re confident that these recommendations may work out the same.
There’s still time to get in on these trades — and others we recommend. Just click here to learn how to gain access.
We’ll be back with you next week.
Sincerely,
John Jagerson & Wade Hansen
Editors, Trading Opportunites
