I love market skeptics, as they will take any particular piece of news – good, neutral, or even just slightly bad – and spin it negatively. Don’t get me wrong: When the markets are acting bearish or a geopolitical event is taking place, we must take notice of it and respond accordingly. But when the markets are bullish, I don’t understand the need to look for a negative angle.
Well, the market skeptics have lots to talk about now. Everyone is spooked after the first week of trading in the new year. Yes, we had a couple of strong days midweek, but the indices are decidedly negative.
As a result, a high Wall of Worry is up – and it can be tough to scale. As a contrarian thinker, this is where I want to jump in and trade options. There are so many uncertainties out there. Oh, and that rally we saw? It was likely caused by a Fed Governor who said the Fed should not raise rates for at least a year.
We found out this past Friday that there wasn’t enough momentum to push markets away from the edge. While volume was on the light side, geopolitical events (the terror attack in France and heightened alerts in Europe) were enough to cause a modest panic. The jobs report was pretty strong, but wage growth retracted, and that was the one positive element many were looking for. Nevertheless, we saw buyers snapping up protection from the start, followed by selling waves on lower turnover.
Which brings me to my point: There are many things to worry about, but will they be enough to disrupt the stock market and the economy?
Worry 1: Crude oil prices
The catastrophic drop in crude oil is one big worry. Crude has fallen from a recent high of $106 per barrel in June to the current level of $48 as oil volatility soared – that is an amazing 54% decline over seven months. There are many questions as to how this will shape the economy, from horrid earnings for oil/energy-related companies but positive effects for the consumer as discretionary income increases.
When will the effects of lower crude prices hit the economy? That is the question.
Worry 2: Fed Policy
Future Fed Policy continues to confound everyone, though they have been very consistent in their language. Just keep your eye on the data (and yes, that includes watching the impact of this drop in crude), as the Fed also watches it and makes their decisions based on what the data is telling them.
Worry 3: Strong US dollar
Why are people concerned about a very strong US dollar? Relative to other economies around the world, the US is growing its GDP at a healthy clip with little impact from inflation. Larry Kudlow of CNBC reminds us often that “King dollar is good for all.” A strong currency is a result of solid economic growth, something that will be a huge benefit to everyone.
The dollar is still considered the world’s reserve currency, and though many felt the Fed was diluting its value with their QE program, that was a temporary situation. Now the rest of the world continues global easing of monetary policy.
A strong dollar will eventually spread its positive impact around the globe. Barring any shocks, growth should continue at a solid pace in 2015.
Worry 4: Equity and bond markets
Can the equity and bond markets continue their recent surges? The last two years brought double digit returns, which completely surprised everyone. Overall, volatility has declined since January 2012 as stocks became disconnected from the overall market. This is still a great environment for a stockpicker, but we must be willing and able to play both sides of the market.
These are just a few of the worries out there. In this world of fast-moving information and trading, a slow trader is bound to be left behind or hurt. Be flexible and willing to change as the winds blow in different directions. There is opportunity out there, as we saw in our Chat Room this week when we booked a huge gain in less than three minutes on Blackberry long calls. Look for these opportunities and act upon them – especially while the Wall of Worry is still high.