2022 was an awful year for the stock market. Tech stocks gave up two-thirds of their gains from the Covid recovery. Amazon.com made history by being the first company to lose a trillion dollars in market cap. The factors that drove the market down have not gone away. Yes, inflation is a bit better, but the Fed is not done raising interest rates, huge tech company layoffs are in the works, the war in Ukraine is not just grinding on but threatening to escalate as the West arms Zelensky to win and not just stop Russian advances. As commonly happens, the Federal Reserve’s interest rate increases are driving the US economy towards a recession, and now Republicans and Democrats are facing off over a debt ceiling fight that could cause financial chaos. How bad could this get? Does the market have a bottom or can we expect a continued free fall?
Core Market Issues vs Short Term Sentiment
At Top Gun Options we routinely make money by placing options trades over just a few days. The market gets all excited over the idea that the Fed is done raising interest rates when Chair Powell and the rest of the Open Market Committee repeatedly say that they intend to stay the course until inflation is under control. The market rises and then plummets when wishful thinking is proven, once again, to be misguided. At Top Gun Options we commonly “buy the rumor and sell on the news” with such issues.
On the other hand, a once-in-century pandemic sweeps across the earth and investors believe it is “just another flu.” Thus, these investors repeatedly invested during the Covid Crash at every minor uptick and then were destroyed. Meanwhile, at Top Gun Options we called the Covid Crash to the day and only missed the start of the recovery by a couple of days. Recognizing when the market is being driven by core issues (fundamental analysis, intrinsic stock value, etc.) or market sentiment (fear, greed, wishful thinking) is important for successful options trading. thus we virtually printed money by recognizing that the core issue was Covid-driven shutdown of the economy until the Fed intervened. At that point we realized the truth of the saying that you cannot fight the Fed as it poured money into the economy, purchased stocks, and drove interest rates to near zero.
The Benefit of Trading Options
Investors who piled into the market after the depths of the financial crisis made tons of money because interest rates were so low that there was really no place else to get a decent return on their money. A sort of mindlessness set in, especially for new investors, who really did believe the guy who give pizza reviews and stock advice when he told them that “stocks always go up.” We saw the same thing amplified in the cryptocurrency markets with huge price surges followed by smaller retreats and then larger surges again. With both stocks and crypto mindlessly throwing more money into the market worked great until it didn’t. The benefit of trading options, as we have repeatedly shown here at Top Gun Options is that we can turn on a dime from bullish trades to bearish trades as back again as situations warrant.
A valid concern today is if the market will have a bottom if the situation in Ukraine or the debt ceiling crisis goes to hell in a handbasket. Add together a deep recession, nukes in Ukraine, default on US debt, political gridlock in Washington, and a Fed with no more tools and one could imagine the market falling to levels not see since the depths of the Financial Crisis wiping out more than a decade of gains. This is really not a good time to be trading options solo but a good time to be trading with competent advice and with a competent trading squadron. If you want to not only protect yourself from but make profits in a bottomless market join one of the trading squadrons at Top Gun Options where we potentially print money in all markets.