January 5th, 2022

This Index Never Experienced Two Negative Consecutive Years

Markets ended 2022 on a decidedly negative note and the December losses helped to ensure that 2022 was the worst year for stocks since 2008 and the worst year for bonds in multiple decades, as both asset classes posted annual declines for the first time since the 1960s.
The losses in stocks and bonds were driven by decades-high inflation, a historic Fed rate hike campaign, and geopolitical unrest. But while those factors were clear negatives for asset prices in 2022, it’s important to note that as we enter 2023, the market is approaching a potentially important transition period that could see each of these headwinds ease in the months ahead.
Inflation has shown definitive signs of peaking and declining. The Consumer Price Index has fallen from a high of 9.1% in June to 7.1% in November, while other metrics of inflation have registered similar declines.

Markets ended 2022

Inflation remains much too high, but if price pressures ease faster than expected, that will present a positive surprise for markets in the first several months of 2023.
Declines of the magnitude we saw in 2022 are usually followed by strong recoveries, not further weakness. The S&P 500 (shown below) hasn’t registered two consecutive negative years since 2002. Will we have a recovery year as we did after 2008?

Markets ended 2022

Bonds, represented by the Bloomberg U.S. Aggregate Bond Index, have never experienced two negative consecutive years. And that reality underscores an important point, that market declines such as we witnessed in 2022 have ultimately yielded substantial long-term opportunities in both stocks and bonds.
Where might be one of those opportunities? Keep reading for your options strategy trade of the day.

Zimmer Biomet Holdings (ZBH) is in the healthcare industry. The company is working on the third phase of its ongoing transformation, which includes changing the complexity of the business in order to accelerate growth and drive value creation. They recently spun off the dental and spine arm of the business.

Markets ended 2022

ZBH is expected to report earnings sometime in early February. Over the next four weeks, I’m targeting a closing price of around $131. It’s currently trading at $128.46.

Now, if we go back to the stock chart from 2021, right before February earnings, you can see that the moving averages were on the rise and the stock climbed higher in the first two weeks of January.

Markets ended 2022

Fast forward and I think a similar pattern may be emerging here in 2023.

I’m looking at a broken-wing butterfly trade.

-1 17 FEB 23 130 call
+1 17 FEB 23 135 call
-1 17 FEB 23 130 put
+1 17 FEB 23 120 put
Net credit: 5.60
Buying Power Needed: $940

The breakeven level on the trade happens at $124, which looks to be a support level on the chart.

Markets ended 2022

If ZBH trades at $131 by 1/20/23, this position would be sitting at an estimated profit of $68. I know that doesn’t sound like much, but $68 on $940 is a 7% gain in two weeks. If you want to follow the stock more closely, you could aim for 20% or more of the max profit. My stop would be if the stock trades under $124.

What do you think? Is this trade worth your consideration? How would you trade it differently? Let me know!

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Jeff Wood

Editor, Filthy Rich Dirt Poor

Trader, Options Testing Lab

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