We’re in the midst of the worst financial crisis since 2008… Banks are tightening credit… And corporate earnings are in a downtrend….
The alarm bells are growing louder. But the market is covering its eyes and ears to the warning signs.
With each passing day, we continue to get confirmation that the stock market is largely disconnected from deteriorating economic fundamentals.
Just in the past week, the number of people applying for unemployment benefits rose higher than expected for the fourth straight week.
And retail sales fell by 1% in March… more than expected and at a faster rate than in February.
Based on these headwinds, I anticipated the S&P 500 would’ve rolled over by now. So it’s surprising to see it’s risen by 3% over the past month.
Does that mean the market is out of the woods yet?
Today, I’ll tell you why we’re closer to answering that question. And I’ll also show you a strategy to generate cash while we wait to find out.
The Economic Picture Is About to Get Clearer
There remain a number of major events occurring over the next two weeks that will give us a clearer picture of where the market is heading, including:
The release of the U.S. first-quarter gross domestic product (GDP) figures on Thursday. Economists estimate real GDP grew by 2% relative to the same quarter a year ago. Any final reading below that level could ignite fears that a recession is imminent.
The Personal Consumption Expenditure index reading for March will be released Friday. This is the Federal Reserve’s preferred measure of inflation. It will be the biggest clue yet on whether the Fed will meet the market’s dovish expectations or remain hawkish in its fight against inflation.
Forty-two percent of the S&P 500’s market cap will report their first-quarter 2023 earnings this week. This includes heavyweights like Microsoft, Alphabet, and Amazon. We’ll have a clearer picture of how consumer and business spending is holding up.
However, the most important event over the next two weeks will be on May 2–3. That’s when the Fed will hold its next Federal Open Markets Committee meeting.
During the meeting, Fed Chairman Jay Powell will announce whether the central bank will hike interest rates for a 10th time since March 2022.
Depending on what he says, Powell can make the market rise or fall with just one sentence.
During his first press conference as the head of the Fed, Powell said the U.S. economic outlook remains strong. Ironically, the S&P 500 fell by 3% over the next two days.
Then there was his mid-December 2018 press conference when the Fed raised rates and said it’ll keep its balance sheet runoff on “autopilot.” The S&P 500 fell by 6% over the next three trading days.
Even as recently as February, when Powell barely hinted at a rate-hike pause, the S&P 500 rose 3% in two days.
The outcome of these events will give us a clearer indication of where the market is headed. But in the meantime, there’s a strategy you can use to profit no matter which direction it goes.
Generate Cash While Waiting
Right now, investors remain roundly bearish, betting the market is going to fall.
According to the Bank of America global fund manager survey, big institutions remain heavily underweight equities and overweight cash.
Large speculators, mostly hedge funds, have more net short positions against the S&P 500 than they have had going back to 2011, per S&P 500 noncommercial futures.
Plus, the AAII Bull/Bear sentiment index remains in overtly bearish territory. This tends to signal above-average market returns are to follow.
The longer the market performs as it has over the past few weeks, the more we’ll see investors unwind their bearish positions and buy back in.
That could push the market higher in the short term.
But as I pointed out above, we’ll soon have a clearer picture of where the market is headed in the long term.
I get it…
Watching the market right now is like watching a tennis match. You can get whiplash from all of the back-and-forth.
But that’s the thing about markets: They can act irrationally. It’s not uncommon to see them rally on bad economic news… and fall on good economic news.
Our job is to be rational and take advantage of the opportunities the market is handing us.
One low-risk opportunity I’m seeing right now is generating income from the market. You can do that by selling call options on any blue-chip stocks that you own.
By setting the strike price about 5% above the current price, with a maturity date one month from now, you can generate meaningful income over this uncertain period.
When selling calls, it’s important to keep in mind the number of shares you own of the underlying company.
If the stock closes above your strike price on the maturity date, you’ll be required to sell 100 shares of the company for each option contract placed.
As always, make sure you do your homework before making any trade or investment.
Analyst, Palm Beach Daily
P.S. If you’re looking for another way to generate income, Daily editor Teeka Tiwari recommends a tiny subsector of crypto that will benefit from a coming “buying panic.”
Unlike most cryptocurrencies, these tokens are programmed to pay you monthly income on top of capital gains. And they’re set to benefit from a surge of activity coming to one of crypto’s largest networks as early as this week.
During his special event, he explained what this catalyst is and what types of tokens will benefit from it. For a limited time, you can stream it right here.