BULLS WIN!
I don’t have a crystal ball for the stock market (nobody does), but I can look at some signs to figure out what might happen. Right now, things seem excellent for the stock market going forward.
The bears, which are people who think the market will go down, might not be making the best choices. If you play it too safe late in 2023, you might miss out on making money.
Let’s talk about the economy. In the third quarter, the U.S. gross domestic product (GDP) grew by a lot—5.2%! That’s even better than the first estimate of 4.9%. Also, the prices for things are getting closer to what the Federal Reserve wants.
As November ends, the S&P 500, which is a big stock index, is doing really well. It’s gone up more than 10% since late October.
At the same time, the NASDAQ, another stock index, is doing even better. It went up by 12%, thanks to the growth of technology and other stocks. The artificial intelligence (AI) trend slowed down a bit in October, but it’s picking up again. Tech stocks are popular again.
Not only is the stock market doing well, but interesting things are happening in the bond market too. The interest rates on U.S. Treasury bonds have gone down, and that’s great for the stock market.
Since October, these interest rates have gone down a lot—more than 70 basis points. This is a sign that people are thinking the Federal Reserve might lower interest rates in 2024.
A guy from the Federal Reserve, Christopher Waller, said on Tuesday that if inflation keeps going down, they might not keep the interest rates high. But don’t get too excited; it might take until 2024 for them to decide.
Different sectors of the economy are doing well too. In November, technology, consumer discretionary (things people buy because they want, not need), real estate, and communication services are doing the best. They all went up more than 10%. On the other hand, energy stocks didn’t do so well.
Technology and communication services stocks went up a lot—over 50% in November. Consumer discretionary stocks went up by more than 33%. However, defensive sectors like utilities, health care, energy, and consumer staples didn’t do as well.
But overall, things seem positive. The New York Stock Exchange Advance/Decline line (NYAD) is going up, showing that many different stocks are doing well.
A going-up NYAD means that many different stocks are doing well, showing a healthy market. This is good news because it means a lot of stocks are going up.
For the less popular investments, like bond proxies, small-caps, and value-style investments, there’s a chance for them to do better now that the challenge of rising yields is getting weaker.
More good news for stocks came on Thursday when the Commerce Department shared that the “core” personal consumption expenditures (PCE) price index went up 0.2% for the month and 3.5% over the year. This matched what people were expecting. Personal income and spending also went up 0.2%, just like people thought it would.
On Thursday, the main U.S. stock market indices mostly went up:
DJIA: +1.47%
S&P 500: +0.38%
NASDAQ: -0.23%
Russell 2000: +0.29%
The CBOE Volatility Index (VIX) went below 13, which means that people are not as scared about the market anymore.
The time of tightening, which means making things stricter, is coming to an end. People expect the fed funds rate to take a break and then go down by 0.25% in May 2024.
Good news!
We avoided stagflation!
The U.S. Bureau of Economic Analysis said that the GDP growth for the third quarter of 2023 was 5.2%, way better than the 2% in the first quarter. This was the fastest growth since the end of 2021, during the COVID recovery.
Also, inflation, which is the rise in prices, didn’t go up too fast. The Personal Consumption Expenditure (PCE) Index, the Fed’s favorite way to measure inflation, only went up 2.8% in the third quarter. This is a big drop from the 4.2% in the first quarter. The “core” PCE, which doesn’t count food and energy, only went up 2.3%, much less than the 3.7% in the second quarter.
So, things are looking good!
Trading Strategy of the Week: IRON CONDOR
At CFU we use fully hedged trading tactics. One of our favorites is the Iron Condor. Here is how we trade it:
The iron condor is an options trading strategy that involves selling both a put spread and a call spread with the same expiration date but different strike prices. This strategy is named “iron condor” because the profit and loss (P&L) graph resembles the shape of a bird with outstretched wings.
Here’s a step-by-step breakdown of the iron condor strategy:
Identify a Neutral Market Outlook:
The iron condor is most effective in a market that is expected to trade within a relatively narrow range. Traders using this strategy anticipate minimal price movement in the underlying asset.
Select an Underlying Asset:
Choose a financial instrument (e.g., stocks, indices, ETFs) on which you want to implement the iron condor strategy.
Choose Expiration Date:
Select options contracts with the same expiration date. Traders often choose a time frame that is roughly 30 to 60 days out.
Select Strike Prices:
Identify a range of strike prices for both call and put options. The key is to choose strikes that are out of the money (OTM) for both calls and puts. This means the stock price is expected to stay between the two sets of strikes.
Sell a Put Spread:
Sell a put option with a higher strike price and simultaneously buy a put option with a lower strike price. This creates a credit spread known as the put credit spread.
Sell a Call Spread:
Sell a call option with a higher strike price and simultaneously buy a call option with a lower strike price. This creates another credit spread known as the call credit spread.
Receive Premium:
As a seller of the options, you receive a premium for both the put and call credit spreads. This premium represents the maximum potential profit for the iron condor.
Defined Risk and Reward:
The iron condor has a limited profit potential and a limited risk. The maximum loss occurs if the underlying asset’s price moves beyond the strike prices of either the call or put spreads.
Manage and Monitor:
Traders need to monitor the position as the market evolves. If the underlying asset’s price moves close to one of the strike prices, adjustments or closing the position may be necessary to limit potential losses.
Close Position Before Expiry:
Traders often close out their iron condor positions before expiration, especially if a significant price move occurs. Closing the position helps to lock in profits or limit losses.
The iron condor strategy is popular among hedge funds because it allows them to profit from low volatility and time decay.
EXAMPLE:
CFU recently opened a neutral to bullish Iron Condor on DKS, Dicks Sporting Goods:
Open a new Iron Condor for March 15, 2024:
BTO 031524 165 C
STO 031524 155 C
BTO 031524 125 P
STO 031524 135 P
Limit 5.45 or more
This is what the profit profile looks like:
Why did we choose to enter this trade?
DKS typically gets volatile from now through the holiday season which spikes the volatility and option prices. However, DKS will usually settle out and trade sideways once everything is said and done. Once the volatility drops, we can buy back the Iron Condor and book our profit. All the while, we maintained a fully hedged position; and our return on risk is >100%.
CFU RESULTS FROM LAST WEEK:
Our fully hedged trading strategy works and is producing results. These are the trades we close out last week and the returns we produced for our members:
HCA: 33%
QQQ: 33%
GTLB: 5%
GTLB: 98%
TSLA: 88%
TSLA: 81%
MDB: 96%
AMD: 98%
AMD: 92%
TSLA: 90%
TSLA: 91%
AMD: 90%
If you haven’t joined CFU yet, what is stopping you?
Here, I’ll throw you a deal, 25% off your first month so you can ease in, see the quality of our service and the results we will produce for you within 4-6 weeks.
PROMO: CFUINSIDER25
The code let’s you skip the line and join today!
Look forward to seeing you inside,
Stephen
Founder, CFU
