It's no secret that the markets have seen some volatility recently.
And by "volatility," I mean a 1,300 point loss over two days…
Now, you may have found yourself wondering where these latest market moves came from – and what exactly you can do to combat these wild price swings.
So, here's what to do…
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Earlier last month, we talked about how Bank of America analysts were calling for the market trend to continue. And this, paired with Goldman Sachs' bear market prediction tool remaining at an "elevated" level, made for a strong argument that the downturn was here to stay.
And it seems like, at least for now, they were correct…
Last week, the Dow Jones Industrial Average totaled a two-day combined loss to more than 1,300 points as Apple shares fell. The S&P 500 fell 2%, led by a decline in bank shares like JPMorgan Chase, while the Nasdaq Composite also dropped 1.4%. The S&P 500 fell back into correction territory, down 10% from its 52-week high.
We kicked off the week with investor concerns surrounding the U.S.-China trade deal and how it isn't as strong as U.S. President Donald Trump hopes.
But this was ramped up on Wednesday, when news broke of the arrest of a top executive at Chinese tech giant Huawei at the request of the U.S. government. Huawei is one of China's most prominent tech companies, and it sells more smartphones than Apple Inc. (Nasdaq: AAPL). But currently, U.S. intelligence agencies view the company as a national security threat. Huawei CFO Meng Wanzhou was arrested by Canadian authorities in Vancouver on Dec. 1. Meng's arrest follows reports this year that the U.S. Department of Justice was investigating whether Huawei violated American sanctions on Iran.
To no one's surprise, this has angered Beijing. And this anger has led to a red alarm for most investors while raising new doubts about the fragile truce that the leaders of the world's top two economies reached just days ago.
On top of this, fears of an impending recession are beginning to pile up, and the idea of a potential slowdown of economic growth also pushed stocks lower. And last Monday, the yield on the three-year Treasury note surpassed its five-year counterpart. This bond-market phenomenon is known as a "yield curve inversion," and it is also seen as a recession signal.
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So, as you can see, this bearish market could very well last – and regardless, we are bound to see volatility continue in the weeks to come.
Now, that doesn't mean you have to pull your investments out altogether – it actually means the opposite. These volatile moves can, at times, deliver the largest profits. And who doesn't need a little extra cash around this time of year?
But you shouldn't just jump into any trade. Remember, we never trade off intuition or fear – and that plan is more important now than ever. On top of having a concrete and well-thought-out trading plan, the trading strategy you use matters as well. And when the market's as volatile as it is now, there are two strategies that can deliver you the biggest profits while also offering you the least amount of risk.
About the Author
Tom Gentile, options trading specialist for Money Map Press, is widely known as America's No. 1 Pattern Trader thanks to his nearly 30 years of experience spotting lucrative patterns in options trading. Tom has taught over 300,000 traders his option trading secrets in a variety of settings, including seminars and workshops. He's also a bestselling author of eight books and training courses.