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March 11, 2022
So How to Plan for 2022 Trading
A different article for you today, with an eye toward the rest of the year.
First, CPI data met expectations (despite the media’s megaphoning high inflation) yesterday, which keeps the Fed on track for a likely quarter point rate increase at next week’s meeting.
Expectations next week are a .25% increase in interest rates, ending in full of the QE program, 3 additional rate increases in 2022 (the dot plot, which we’ll cover after the meeting) and a slow but steady plan for “QT” or balance sheet reduction.
If the Fed meets those expectations, and, if we see any material improvement in the Ukraine crisis, we should see the markets bounce back toward the 4500 level in the S&P 500.
Any change in the Fed action that doesn’t meet those expectations will lead to another round of selling.
A Different Look at Inflation
While inflation is high, it is important to remember that it is not being measured against like-to-like economies. Now, what do I mean by that?
Think back to 2020 … did we have a normal economy in that year? No. It was largely shut down across the globe – and created the first stage of the supply chain problems we are living through right now.
Then, in 2021, as the economy (globally) re-opened more broadly, we encountered the second stage of the supply chain problem, increased demand and the third stage problem, labor (too little).
But normalcy in the economy didn’t truly return until Q3/Q4 2021. So we are not now measuring inflation against anything historically normal. In other words, we’re comparing apples, oranges and grapefruits.
Does that help us? Nope. But it gives some context to the future because as the labor supply problem eases, that implies increased production which implies a restoration of supply balanced against demand.
Yield Curve Update: Rising, back to .27%, or 27 basis points. Still in the danger zone and moving up or down daily with the news out of Ukraine
Planning Your 2022 Trading
During this year’s Investor’s Blueprint Live, I talked about not being afraid to trade “boring” stocks.
In part, that’s because we’re stuck right now with no catalyst for growth in the U.S. or world economies competing with inflation, labor market recovery, still-high demand and still-low supply.
Research Inflation, Interest-Rate and Defensive Stocks
We’ll begin highlighting stocks that meet these categories in the days and weeks ahead, but, it is our suggestion that stock and options traders begin building a ‘bullpen’ of ‘boring’ stocks. Stocks that have lower beta, tighter trading ranges and consistent earnings.
Bear in mind that boring does not mean you can’t still meet your goals.
We shared with Investor’s Blueprint Live attendees our results on Dow (DOW) in 2021 – which certainly qualifies as a boring stock.
Yet, using a simple application of Put and Call options and capturing dividends each quarter, we returned 48% annual income from a stock which moved just 1% for the year (from January through December).
Here are the 2021 Trading Results for DOW from our Triple Play Income service:
Throughout 2021, we made a total of 24 trades. On average capital per trade, we gained $2,893 in total income, including premium and dividends.
Yet, the stock price at the start of the year ($55.45) barely moved in 12 months ($56.72).
This tactic of leveraging options + dividends yielded a 48.9% annual return on average capital from a stock most people probably don’t consider exciting.
These are the types of stocks you’ll want short-term to hedge against inflation, which will remain high, at least until Summer / Q3 2022, interest rate increases and a probable slowing of the economy.
We’ll look at others in the days ahead.
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