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I'll come right out and say it – long term, I think it's a mistake to bet against the bull market. Do that, and you'd be betting against $3.3 trillion in stimulus; around 18% of all dollars, period, were "printed" in 2020, and that's a huge reason why the stock market soared more than 75% in the middle of an economy-killing pandemic.
Another powerful bullish force is the estimated 30 million new retail investors coming off the sidelines with mobile investing apps. GameStop was just a taste of the kind of muscle these folks are flexing right now.
But when stocks go that far, that fast – not just under these conditions, but partly because of them – it makes sense to take a minute, look around, and see what the market's telling you.
Right now, the market's saying "watch out" – there are a couple of red lights flashing out there.
Don't get me wrong: I'm not saying it's time to head for the bunkers; I think there's still plenty of money to be made – and lots of opportunities to jump on.
It can be much easier than you think to make out like a bandit when stocks dive…
Here's What Could Stop This Momentum
The prime suspect when the word "bubble" starts flying around, like it is now, is valuations: What are company shares trading for? What are they really worth?
There's some cause for concern there.
As of Friday, Feb. 26, the S&P 500 trailing 12-month price/earnings (P/E) ratio was 43.74, just shy of twice what it was 12 months ago during the "COVID-19 crash," and – a little spooky – higher than at just about any time since the early 2000s "dot–com crash."
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There are rising Treasury bond yields and the housing market, too; typically, mortgage rates and 10-year Treasury yields are closely related.
Treasury yields started creeping up last week, and they're still trading in the 1.4% neighborhood; that's quite a bit higher than the near-zero yield offered at the start of the COVID-19 crash, but still historically low. Those low rates have done a lot to fuel unusually strong (for a pandemic-crippled economy that's seen double-digit unemployment) housing demand. A spike in mortgage rates could, well, drive a stake through that strong demand.
To top it off, China's markets are seeing and experiencing some of the same worrying signs, albeit at a smaller scale. The government there is becoming increasingly focused on trimming down the mountains of debt sloshing around China's economy.
In fact, big economies and central banks around the world are looking forward to the eventual end of the coronavirus pandemic and the likelihood that they'll have to cut back on the stimulus that's helped keep the lights on from Boston to Beijing. That's not necessarily bad news for U.S. markets, but it's not good news, either.
Inflation could be a factor in all this, too; not tomorrow, necessarily, but at some point in the next two, three quarters; when hot economic growth meets a huge, expanding money supply, high-school economics tells us inflation happens; that's often bad news for stocks.
It's clear investors are worried. They're worried about the "I-word," they're worried about the long, cheap-debt party coming to an end. We can probably count on the Fed to pull out all the stops to keep it going, but the worry is the thing.
However, like I said earlier, I'm not here to rain on anyone's parade! Market corrections are healthy, and they need to happen for stocks to continue to climb.
Here's what I suggest we do about it.
What to Do When Markets Slide
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I think we could see stocks take a tumble if interest rates go up another 30 or 40 basis points; I think fear will overwhelm optimism, and a lot of investors will pull the ripcord.
Investors and traders who are protected don't need to worry about that ripcord; they can stay in, easily, with some protective puts on the SPDR S&P 500 Trust ETF (NYSEArca: SPY), which tracks the performance of the S&P 500 for about a tenth of the price.
I see the potential for a 15% to 20% move to the downside on that index, so consider looking at a SPY April 16, 2021 $330. More important than that is whipping up a list of stocks to buy when prices drop, and the market hangs a big "SALE!" sign out there.
My list has names like Apple Inc. (NASDAQ: AAPL) and Alphabet Inc. (NASDAQ: GOOG), but I'd also take the opportunity to gear some holdings toward stocks that'll do well in economic recovery – financials, for one, but also the energy sector – traditional and renewables – and industrial stocks.
I can think of a couple of ways someone might potentially pull off a "shopping list" of stocks using certain kinds of options. When a trader buys puts, they're usually expecting to pocket some cash as the stock or ETF go down – that's Trading 101. But when puts are sold, the seller is usually bullish on the stock and is looking to seize the potential to own it on the cheap.
In a theoretical scenario, it's entirely possible a put seller could end up owning a dynamite $50 stock for $35 a share, maybe even less, in pretty much any kind of market conditions. If that weren't enough, it's also possible to bank fast income from the premium. My colleague, Tom Gentile, recently used a similar strategy to set himself up for his most successful year yet – 23 wins… and ZERO losses since April 2020 – one of the wildest markets on record. He can fill you in on the details of this remarkable feat, and how he did it, right here.
About the Author
Andrew Keene, editor of the 1450 Club, Super Options, and Project 303 at Money Map Press, is a globally known trader and a renowned expert on all things options.