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Investors Are Backing up the Truck

Posted May 11, 2022

Markets entered “extreme fear” mode on Monday, according to CNN’s Fear and Greed Index.

CNN notes, “The Fear and Greed Index is a compilation of seven different indicators that measure some aspect of stock market behavior. They are market momentum, stock price strength, stock price breadth, put and call options, junk bond demand, market volatility, and safe-haven demand.”

That’s all well and good, but you’ll notice that the mainstream media is constantly focused on the topic du jour; there’s never any actionable advice.

After all, whoever said diversification is key?

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When markets are in free fall, you’ll see stories about stocks “possibly falling more” or how “there may be more pain ahead.” The hedging is a clear sign they don’t know what’s going to happen next.

The doom-and-gloomers will awake up from their cold slumber to offer sage advice about what already happened. There will even be some chatter online about a nefarious puppet master pulling the strings and making the markets fall on purpose.

But the stock market ebbs and flows. There’s nothing abnormal about that. As Omar in The Wire said, "It’s all in the game."

And if you stick with us, we've got a way to play the current ups and downs right now.

Pullbacks, Corrections, and Bear Markets

I argued at the beginning of the year that we’ve been operating in a bear market since before the pandemic even happened. The two-year market run-up was artificially created with the fake dollars printed in Washington. And once prices fell slowly but surely at the end of 2021, the writing was on the wall.

At the end of March, when the Fed started meddling with interest rates, I wrote that the U.S. economy is at a tipping point:

The Fed announced it plans to keep raising interest rates throughout the year, with policymakers predicting the benchmark rate — the rate at which banks borrow from and lend to each other overnight — will hit 1.9%. Experts believe this is a conservative estimate, and investors are paying close attention because it affects nearly every sector of the economy, from stocks and bonds to housing and education costs.

But raising rates too fast can easily lead to a recession, much like the U.S. experienced in the 1980s when rising oil prices, government overspending, and rising wages led to out-of-control inflation of 13.5%. To tackle inflation, the Fed kept raising rates until they hit 21% in 1981. But this caused the demand for new money to dry up, which in turn killed the housing market, business development, and economic growth.

We’re seeing eerily similar signs today, but with the added pressure of student loans. And when rates rise even further, borrowers won’t be able to afford their mortgages or other loans...

For reference, a pullback is typically defined as a drop of 5%–10%, a correction is a drop of 10%–20%, and a bear market is a drop of 20% or more.

It may feel like the right thing to panic-sell along with the masses. But when the bears come to town, just remember that you can always lower your cost average in companies that you like. After all, if you liked a stock at $20, you should like it even more if it's trading for $15.

And when the market feels like this...

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You know it’s probably the right time to cautiously buy.

But make sure to keep an eye on the CBOE S&P 500 Volatility Index (VIX). According to the index, a level of 40 indicates the market’s entered a full-blown correction. That’s when you’d want to start buying more. But because it hasn’t reached that level, experts say the market’s still not at the bottom just yet.

Playing Both Sides

Personally, I love a good market correction because it means you can get into stocks for a lot cheaper. You can also lower your cost average and even open new positions in companies that you wouldn’t have considered before. After all, like I said above, we’ve known for years that the market is overvalued.

So instead of selling in May, playing the other side of the market through options trades looks like an attractive strategy right now.

For example, if I were a betting man, I'd bet against Chipotle (NYSE: CMG) because, based on my metrics, it's one of the most overvalued companies in the market right now. But if I were to go ahead and buy puts or even short the stock, I'd want to make sure I'm buying the right options and getting the best deal.

That's where I'd turn to our in-house options expert, Sean McCloskey.

Last week, he told me about his little-known market reversal strategy that's minting serious profits in this environment.

Just last year, Sean banked his readers back-to-back gains of more than 1,000% and nearly 600%.

And with current market volatility, he's gearing up to do it again.

For a fresh take on what to do in this market environment, tune in next week when Sean reveals his strategy to profit whether the market's up, down, or sideways. Simply click here to be automatically placed on the prescreen list and we'll notify you when the event is set to start.

Stay free,

Alexander Boulden
Editor, Wealth Daily

After Alexander’s passion for economics and investing drew him to one of the largest financial publishers in the world, where he rubbed elbows with former Chicago Board Options Exchange floor traders, Wall Street hedge fund managers, and International Monetary Fund analysts, he decided to take up the pen and guide others through this new age of investing.

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