What Works, What Doesn’t, Why It Matters

What Works

Market momentum is green. We’re continuing to deploy cash into sectors that continue to perform well. These include energy production, oil refining, and midstream storage and pipelines. 

It’s funny that I said that a Bear Market rally was likely through June 10, and now the money is flowing in. I’m talking BIG capital moves. Money recently screamed off the sideline even during one-day downturns. It shouldn’t make sense on the surface. 

We continue to see a capital rotation that is quite strong. Today, more than 206 stocks hit 52-week highs, and there was no shortage of companies in the energy supply chain within that list. 

I think that we need to focus solely on June 14/15, when the Federal Reserve holds its third meeting of the year. And I believe that the big bet against the Fed will lose. Here’s how to handle it and what works currently.

Don’t Fight the Fed

Last week, Vice-Chair Lael Brainard told everyone that she doesn’t foresee any situation where the Fed stops raising interest rates in September. We’ve heard a similar sentiment from James Bullard, Jerome Powell, and Esther George. Yet the market just doesn’t believe that the Fed will flinch. 

I expect the Fed to lean in harder on its rate hikes and tightening in its policy meeting. There is now even a small probability that the Fed might hike rates by 100 basis points in July. This development came after former Fed Chair and current Treasury Secretary Janet Yellen said that inflation levels are now “unacceptable. 

The Atlanta Federal Reserve bank has slashed its second-quarter GDP estimate to under 1%. So we’re not just a few ticks away from officially hitting a recession. 

So why go crazy? I can afford to take a step back… wait ten days, and then take an excellent hard aim at any fake rally we appear to be living in.

I believe we are already in a recession. I know that’s not popular. I know that’s contrarian. But we have never had oil prices surge the way they have in recent months and NOT had a recession. It’s in every history book you seek.

What Works?

Another reason I don’t believe this rally will be sustainable is what I look at each day on Finviz.com. Today, 206 equities hit 52-week highs, while 169 hit 52-week lows. 

There have been many companies that continue to drop, even though the markets are moving higher. That signals that short squeezes and speculators are chasing gains before next week.

I still remind everyone that there are great companies with real assets that continue to trade at low valuations. So take what the market is giving you right now, and be willing to sell puts or credit spreads on stocks you want to own at far lower prices. 

For example, Phillips 66 (PSX) hit a 52-week high north of $100. The dividend is attractive at 3.5.3%. We will have a diesel shortage later this summer/early fall. Refineries are doing great. But why buy a $109 stock and wait for the dividend. 

Why subject myself to a situation where a selloff could quickly push this stock back to $95 as people take profits off the table?

That’s why I advocate that you should be paid to buy the stock if the stock drops by 10% to 15%. It’s a company you want to own… at a much lower price. So you sell to open the July 15, 2022, $95 put. 

You buy the $90 put. This creates a $250 margin spread, where you can make 9.4% on your money over the next six weeks. The probability of profit is 91.1%. You’ll gladly buy the stock if there is a pullback. That’s the worst-case scenario. 

Again, take what the market is giving you. For example, a 9.41% return annualized to 88.1% for a stock you’d be happy to buy much lower. This is how to trade in any market.

Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.
Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.

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