Blog | CB Investment Management

Option Strategies For Unprecedented Equity Market Bifurcation.

Western economic policy has drifted away from established norms on both deficit financing and inflation priority. New and extreme alternative and discretionary policies have evolved, with policy makers increasingly engaged in activity that is inevitably leading to record market distortions.

In Europe

The eurozone economy is not in stagnation due to rate hikes. It is in stagnation due to the wrong fiscal, industrial, and energy policies. What reason is there for cutting rates? Just one. Cheaper funding for fiscally irresponsible states. The state promises you free things and charges you more with less purchasing power, higher taxes, and impoverishment. There is no such thing as what they call inclusive monetary and fiscal policy. It is the recipe for stagnation.

Daniel Lacalle

In the USA

The Fed’s forecasts have missed their mark consistently. They appear to be more of a wish list. This week the Fed Chair was asked a commonsense question about their latest forecast.

Fed expects the unemployment rate to remain at 4% by the end of the year and 4.2% by the end of the 2025 and in 2026. Who actually believes this nonsense?

Sven Henrich

Bifurcation

The chart below shows the S&P 500 since 2005. The second line is the cumulative new highs relative to new lows.  As you can see the new highs to new lows used to trend almost exactly with the S&P 500.

That is until the rally since November 2023 through to today. In this case, the new highs to new lows continued to decline even when the S&P 500 bottomed out in early November 2023.

That was when combined new “stimulus” policies were introduced.

Narrow breadth should ultimately be considered a warning sign of a major high and all indications are that we are getting to record conditions that in the past have signaled a top.

Despite repeated record highs in the Nasdaq, there is a persistent bug. Most of these days have seen more stocks at 52-week lows than highs. It’s happened 9 out of 10 days. There has been only one similar cluster in ~40 years: late October through early November 2007.

The 10 year peak in the Nasdaq was November 2007.

Options trades

For any investor who would like to keep their long position in equities but get protection from the possibility of a major correction, or take a speculative short position, there are option strategies that are ideal for this strategy.

Currently options prices, in terms of implied volatility, are near record low levels. So this is record low cost protection for an equity portfolio at an important time. There are multiple ways to execute this strategy. Please make sure you have excellent advice before executing.                                                   

As policy is changing investing has become much more uncertain and harder to risk manage. It has become essential to trade options for optimal risk management. The option volume, positions and scale of trading has exploded. Consider to what extent you should get involved.

Summary

Investors need to carefully consider the extraordinary “stimulus” efforts being made, and the real market and economic impact. The record dispersion of equity performance over the last 9 months sends a confusing picture. Looking at the market cap weighted indexes it might seem to have been successful. However, it is just a handful of stocks that have benefited spectacularly, while the Russell 2000 has remained in a bear market since its highs in 2021.

Be very careful about how you read what the equity market is really telling you. There are important record signals about current conditions that need your attention, and now you have a great opportunity to risk manage your portfolio with extraordinarily cheap options.

Best Practice is a matter of your Best Interest.


Education and a Commitment to Informed Consent is an Obligation.

Chris Belchamber is an IRMAA Certified Planner

Medicare’s IRMAA impacts every retirement plan. Learning how to mitigate it is available via IRMAA Certified Planners designation.

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