2022 and the Demise of Growth Stocks

It was a bad year for the stock market but, more specifically, it was a bad year for the market in general and a terrible year for the sorts of growth stocks that had prospered for a decade. Meanwhile, traditional “value stocks” did just fine, thank you very much. While Amazon.com made history as the first company to lose $1 trillion in market capitalization, Coca Cola started the year at $59 a share and ended it at $63.61 and Shell Oil started the year at $44.64 and ended it at $56.95. While this was going on Amazon.com started the year at $170.40 and ended the year at $84. As noted in an article in Bloomberg this was the year that the tide went out and we got to see who was swimming naked in the investment sense.

2022 Was the Year They Changed the Investing Rules for Success

Excessively low interest rates kept many stocks alive and heading upward for a decade. It rarely failed for investors to make money buying the dip after a correction because “stocks always go higher” as the guy who gave stock advice and gave pizza reviews said before the bottom dropped out of the market. The rules for success for years were pretty simple. Buy, buy, buy, and when the market falls, buy again. Then inflation hit, the Fed finally woke up and started raising interest rates. Despite wishful thinking on the part of the market, the Fed has not backed off. The easy money house of cards collapsed and companies in insurance, food, and energy had, if not a good year, an acceptable one.

But They Did Not Change the Options Trading Rules for Success!

At Top Gun Options we are able to turn on a dime and change our trading strategies so that while we were making money in a rising market, we can now make money in a falling market. And when the market has bottomed out, we will be ready to pivot again and take advantage of a rising market. We continue to hedge risk in all of our trades, pay attention to factors that are likely to drive markets from domestic issues to things happening on the other side of the world. Our DRINC acronym has served us well over the years and with the war in Ukraine likely to continue, China still threatening Taiwan, North Korea not in possession of solid fuel rock technology, and Iran making attack drones for Russia and anyone who wants to cause trouble across the world.

Who Will Recover and Who Will Not in 2023 and Beyond?

We just wrote about the risk climate going into 2023. It is likely that until the Fed is done raising rates that the market will continue to suffer. Moving away from market sentiment and looking at company fundamentals, who will survive and who will go bankrupt, get taken over, or become of no consequence before all of the excess is wrung out of the market? And who will come back stronger as the economy and market eventually recover? For traders interested in profiting from synthetic long stock strategies using LEAPS this is something to think through. A good example is Amazon.com which in terms of the current economy and market sentiment was overpriced. Their business model will still work going forward and, in all likelihood, their stock price will head back up although perhaps not as high as before or at least no right away.

Working through all of this and doing it profitably can be tricky in today’s market. That is why we strongly suggest joining one of our trading squadrons at Top Gun Options and not trading alone under current conditions.