Volatility is back! And it’s back in a big way. Indeed, since the revelation late Thanksgiving night that a new COVID-19 variant, dubbed “Omicron,” had been identified in South Africa, markets have been extremely nervous.
That was evidenced by Friday’s huge holiday-shortened session selloff, where the S&P 500 and NASDAQ Composite both got smacked down by 2.2%, respectively, while the Dow took an even bigger hit of 2.5%. The small-cap Russell 2000 really hit the skids, diving 3.7% last Friday.
Then, after a weekend to digest the data (and the Thanksgiving turkey), markets came back with a strong session on Monday. Yet that strength was short-lived, as stocks gave back those Monday gains, and then some, on Tuesday and again on Wednesday.
Since the Federal Reserve stepped in to help rescue the markets in March 2020, I’ve been telling my newsletter advisory subscribers that there were “Four Horsemen” that would keep the bull market galloping. And, once one or more of those horsemen stumbled, the bull market run could falter and/or take a nasty fall.
Now, over the past several days, two of the horsemen have stepped in the mire, and as such, these two horsemen have the potential of bring this bull market to a halt.
For those who aren’t subscribers to my newsletter advisory services, the “Four Horsemen” of the bull market are 1) Accommodative Federal Reserve policy, 2) Accommodative fiscal policy, 3) COVID-19/vaccine optimism and 4) Earnings strength.
While two of the Four Horsemen remain intact, i.e., accommodative fiscal policy and earnings strength, the other two — COVID-19/vaccine optimism and Fed policy — might soon be turning bearish.
As for the COVID-19/vaccine optimism, the new Omicron variant has everyone at least a little bit worried that we could see more worldwide lockdowns of the sort we saw last year. And while this is a possibility, we are very far from this being a probability. In fact, I am of the opinion that Friday’s selling was a huge overreaction to the threat of a new variant causing a material shutdown of the economy, either internationally or here at home.
Is Omicron a cause for concern? Yes. Is it a cause for panic selling? No way. Think of it like the Delta variant, which caused a hiccup in markets this summer that led to a “buy-the-dip” opportunity that saw your money soar to new all-time highs by early winter.
Of course, we are going to monitor the Omicron situation to see if it gets worse (in fact, as I wrote this, I got news of the first confirmed case of Omicron just a few hundred miles north of me in San Francisco, Calif.). Yet at this point, I am not even close to pushing the panic button — and you shouldn’t be either.
As for the other “Horseman of the Apocalypse,” Federal Reserve policy, well, it is here that I think we need to be a bit more concerned.
On Tuesday, Federal Reserve Chairman Jerome Powell essentially announced the Fed will accelerate the tapering of quantitative easing (QE) at the December Federal Open Market Committee meeting — despite the Omicron threat to the recovery. And while that doesn’t automatically mean that interest rate hikes will come sooner than later, it does certainly increase the chances.
If the Fed tapers QE and raises rates to control inflation into a COVID-related loss of economic momentum, that could well be the policy mistake that ends the rally.
Now, Powell speaking hawkishly during his Congressional testimony on Tuesday doesn’t mean the Fed will make a policy mistake. Moreover, I think the Fed will “blink” on tightening policy if Omicron becomes a threat to the economy, regardless of what’s happening with inflation.
However, the most likely endgame for this bull market is a Fed policy mistake. The reason why is that this bull market will eventually end, and it will do so for the same reason that most bull markets end, i.e., the Fed will get too aggressive and eventually kill the market rally by raising rates too high and choking off economic growth.
Now, prior to Omicron and Powell’s testimony on Tuesday, I thought such a policy mistake was likely quarters, if not years, away. However, based on the past couple of days, that endgame might be getting closer than I thought.
So, given the current situation in markets, how does one stay nimble and get the most profit out of your trading while limiting your overall dollar exposure?
The answer is by using options — and the best way I know how to use options is by embracing “High Velocity Options” of the sort I use in my trading services.
These High Velocity Options are typically “slightly out of the money” call or put options with an expiration date of 30 to 90 days. They are fast trades that generate double- and triple-digit-percentage profits.
And the timing for these High Velocity Options couldn’t be any better, as we are less than two weeks away from the Dec. 14 launch of my new advisory trading service, aptly called “High Velocity Options.”
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In this market, the best way to wrangle those Two Horsemen of the Apocalypse is to outsmart them with High Velocity Options.
On Wisdom and Understanding
“He that is void of wisdom despiseth his neighbour: but a man of understanding holdeth his peace.”
— Proverbs 11:12
In our exceedingly polarized, tribalized social and political climate, it’s easy to “despiseth” your neighbor if they hold different views from yours. Yet rather than cultivate your hatred to the point where it explodes, why not try to become a man of understanding? And you start by holding your peace, thinking through the opposing side’s ideas, and trying your best to avoid the pull of your own “in group.” Doing this might not be easy, but you’ll be surprised at how much wisdom you gain in the process.
Wisdom about money, investing and life can be found anywhere. If you have a good quote that you’d like me to share with your fellow readers, send it to me, along with any comments, questions and suggestions you have about my newsletters, seminars or anything else. Click here to ask Jim.