Options Arena: Recession? Won’t Stop Us
Maybe the fact I’m bringing this up confirms the worst is behind us?
Either way…It seems highly likely the United States is in a recession. GDP shrank 1.5% in the first quarter, and that could just be the beginning. And beyond the numbers, we’re facing challenges that we haven’t seen in many years. Inflation — despite a slight slowdown according to the CPE release — is STILL at its highest in four decades… At the same time, consumer spending is in rapid decline (just check the charts of Walmart and Target)…
And even the real estate market is feeling the pain, with home sales down almost 17% from last month.Point is, we’re all pretty bootstrapped right now. That’s why I asked our True Options Masters this week: What’s your best trade — or even best piece of advice — for dealing with a recession? We got quite a spread of answers, as we tend to. And some are questioning whether we’re even in a true recession yet…
Let us know what you think at TrueOptions@BanyanHill.com.
Chad: A Recession Doesn’t Have to Be All Bear
My best piece of advice for a recession?I’ll go with not losing money. There’s no doubt in my mind we’re in a recession. That will become more evident in the coming weeks as economic data comes out. But don’t think it’s all bearish for the market. Just because the economy turns lower doesn’t mean stocks are set to dive. After all, most of the weakness has been priced in already. The S&P 500 has fallen 20% from its peak (pure bear market territory). And many traders believe the weak economic data means the Fed will go back to supporting the economy. These are both reasons to be bullish — in the short term. I still expect stocks to head lower, but not until after a strong bear market rally. The next year and a half will be a trader’s market. Buy-and-hold investors will continue to get shaken out, but traders will be making money. Because as option traders, we can make money whether stocks are going up OR down. We just have to play the trend.
This ETF Fell 40+% in the Last 3 Recessions — But Don’t Trade It Yet…
A recession isn’t guaranteed yet.The chart below shows new orders for durable goods.
Recessions tend to begin when the number of new orders turns down.
I was surprised to see that, for now, they’re still in an uptrend.
Now, it’s possible the economy will weaken but not enter a recession. This has happened before, and is shown by the red lines in the chart.
I’ve tested dozens of economic indicators, and new orders are one of the few that consistently forecast trends in the stock market.When the six-month rate of change of this indicator is negative, we tend to see the stock market struggle. But new orders turned down last year and then surged in the past few months. Under normal circumstances, I’d say this means we will enjoy a strong economy. But this isn’t a normal time. Supply chain issues are most likely affecting new orders, and the recent surge is likely due to inventory replenishment instead of consumption. Still, it’s not yet time to trade the recession. When it is time, I like put options on Industrial Select Sector SPDR Fund (XLI). This ETF tracks the manufacturing sector and manufacturers are always hit hard in recessions. XLI has fallen at least 40% in each of the past three recessions. There’s plenty of downside potential, and I’ll be watching the monthly report on new orders for the timing of this trade.
Amber: These Puts Can Double by Next Year
I don’t know whether or not there will be a recession, but I do know an important economic indicator is warning of that possibility. The chart below shows the difference between yields on investment-grade corporate bonds and 10-year Treasurys.Times when the reading was above the current value are highlighted in red… And each one was associated with a recession and bear market.
When the line is rising, investors are demanding more compensation to own corporate bonds. They’re risk-averse and that is generally bearish for stocks. On the other hand, a falling line says that investors are searching for risky assets, which is bullish.I applied a six-month rate of change at the bottom. Rapid changes in risk tolerance show traders are growing worried. The current level has rarely occurred in the past — but bad things happened every time it did. My trade for this is in junk bonds. If traders are worried about high-grade bonds as the chart shows, junk will fare even worse. Put options on iShares iBoxx $ High Yield Corporate Bond ETF (HYG) are attractive. I’d give this trade time to work, using Dec $80 puts at about $4.50. HYG has already fallen about 12% from its highs. I expect a decline of more than 20%, and that means these puts can double.
Chris: My Gut Take to Trading This Market
I don’t have a scientific approach for this, but in my opinion the best way to trade right now is buy when markets bottom and sell when momentum slows.This past week’s low was fairly easy to time. Markets more or less moved sideways for the first time in months, forming a strong floor so stocks could rally. I bought some calls that expired Friday, sold them Friday morning, then moved the money into calls that expire June 3, 10, and 17. Rallies aren’t the time to play it safe, so I’m buying very short-dated options. When they go up about 200%, I sell and move to the following Friday. The S&P 500 rallied 11% between March 15 and March 29 during the last rally. If it gets close to 10% again, I’ll de-risk and take some money off the table. This bear has taught me I’m terrible at trading puts, so I’ll just wait for the next bottom and do it again. Mike is offering a scientific, systematic approach for this basic strategy using his new Greed Gauge. We went ahead and signed you up for its official unveiling on Tuesday. We want you to see this, because the indictor just flashed a buy signal for the whole market for the first time in about two months.
But only Mike knows the best stocks to buy right now. Tune in Tuesday night at 8pm ET at our private website. In fact, go there now and review all the material Mike and I have already covered.
Maybe you’re in full-blown recession mode, like Chad… Still on the fence, like Amber and Mike… Or even taking things rally by rally, like Chris.TrueOptions@BanyanHill.com. Enjoy the rest of your weekend, and we’ll be back to you tomorrow morning…We want to hear from you! Let us know your thoughts by writing in to
Regards,Mike Merson Managing Editor, True Options Masters