Dec 24, 20226 min
Happy holidays Wealth Builders!
This week, we received data that the US economy is still staying strong with GDP growing at an annual pace of 3.2% between July and September. This was above the 2.9% estimate from a month ago.
A broad-base sell-off followed as this may indicate that the Federal Reserve’s battle to cool the economy to fight inflation is having only a limited impact.
I know. This sounds counterintuitive, but in a simplistic Econ101 explanation, the markets want to see a slightly declining economy and higher unemployment. The thinking behind this is to encourage people to save more money thus decreasing the flow of money into circulation. As money becomes more "rare," the value of the dollar starts to increase. And if there is less money being passed around, companies will be incentivized to stop increasing prices on their goods and services, thus decreasing inflation. And what happens when the Federal Reserve sees data on lower inflation? That's right. They'll have a higher incentive to not want to increase interest rates as much, which is positive news for the stock market.
Technicals 📈
Here's this week's heat map:
SPY
With the latest rejection to our downward trending resistance line, I'm predicting the markets are going to drift a little lower for the next couple of trading days. Typically on the last few days of December, many institutional traders are on vacation. You may have noticed that there has been lower trading volume.
Observe and compare the last candlestick for this week to the QQQ and DIA.
QQQ
There is a longer bearish candlestick for QQQ as tech shares slid with Tesla's sell-off taking the lead.
DIA
However, DOW30 stocks take the lead again and ended the week with a green candlestick, indicating that institutions are favoring these companies.
Dividend-Paying Stocks I'm Eyeing
During times of uncertainty, billion dollar institutions focus more of their investments in "boring," dividend-paying stocks that typically have weathered through many past storms.
Here are the same stocks I'm still eyeing. I haven't bought anymore shares lately. However, if I observe these stocks continue to trend higher than before, I will be inclined to purchase more. If the stocks drop, I will stay put and do nothing.
WM
SBUX
HD
MA
V
Remember to let the trend be your friend.
Some of you are still starting new wheels on high-risk underlyings or adding more shares to your long-term holds. Again, you can do what you want with your portfolio. However, market conditions do not favor these growth stocks at the moment. If you continue to add more shares of stocks that are continuously trending downward, you will continue to magnify your unrealized loss.
Stay patient and observe the news and technical trends. Once we see some positive sentiment and a confirmed upward trend, we can then slowly scale into these growth stocks. For now, focus more on the steady, dividend-paying, DOW30 components.
Steve's Trades
I'm still selling covered calls against my long-term holds. I'm choosing around delta 0.10s or lower with expiration dates in February.
If you're going to do the same, make sure you choose a strike you are comfortable with. Remember that the markets will rally again sooner or later and you want to be prepared for that.
AMZN Bear Call Spreads:
If you had bear call spreads from a couple of weeks ago and see that your option contracts have decayed around 50% or more, feel free to close your positions.
This week, I'm choosing AMZN as my underlying stock to set up bear call spreads. Looking at the technicals, we are still trending downward with a potential resistance level at $102.
However, keep in mind that they are expected to report earnings on February 2, 2023. If you are not comfortable with the volatility, feel free to sit it out.
Expiration Date: February 17, 2022
Step 1: Buy 1 $140 strike call option (delta 0.02) for $14.
Step 2: Sell 1 $105 strike call option (delta 0.15) for $111.
Step 3: Set up a buy stop order for 100 shares for $104 to cover
Credit received: $111 - $14 = $94 per spread
All in all, make sure to see if this trade fits your own risk tolerance. You can also tweak some of the numbers around so you feel more comfortable. And of course, you can always practice these trades in a paper trading account to understand the numbers better.
As always, please don't get too greedy. Many of you made thousands of dollars during the downward market in the first half of the year. However, some of you had too many spreads open and weren't able to cover yourselves when we had a reversal back up or maybe you set your second leg strike prices too low (close to the money) to get those larger premiums.
Remember that the markets will eventually go back higher in the long run, so it's important that you prepare yourself when this happens.
Trade responsibly and stay patient.
Ask Steve 💭
Let's see what some of our members asked this week. Here are the top questions we received:
Q1: Hi! Thanks for reminding us to not buy a lot of shares at once and to stick to the dividend stocks. Out of all my friends, I can confidently say that I've been doing the best with being patient. As we approach closer to the end of the year, do you see a Santa Rally?
A: That's great news! Unfortunately, I don't see a Santa Rally for this year. However, I am anticipating that markets will rebound next year if we get lower inflation data. Hang in there! You're doing great!
Q2: Do you recommend TD Ameritrade or Robinhood?
A: I like TD Ameritrade because of their better customer service and longer years in service as a brokerage.
Q3: I opened an SBUX iron condor (exp 12/30) from 2 weeks ago at the suggested strike prices. I closed my BPS side of the condor and left with the BCS. I have been assigned the 100 shares at $104 strike price. Given that SBUX decreased in price, would you recommend to hold to then sell at or above $104 or keep selling calls against the 100 shares? If the latter, should one sell calls at a delta 30 and then roll up and out or sell at $104?
A: Great job with closing your bull put spread (BPS) and locking in your profits. Now that you have the shares at $104, you can consider selling calls against your shares at the $104 strike around the February 3 expiration date. Premiums are around $200 at the moment. If you believe that SBUX will trend even lower, you can consider selling the $103 or $102 strike since you already lowered your cost basis with your BPS and BCS premiums. Keep us posted!
Q4: I've been selling bear call spreads on AMZN over the majority of the year and made quite a bit of money. Just to make sure, this will be taxed at the end of the year right?
Correct. You will be taxed since you traded in your taxable brokerage cash account. This is considered your income. Congrats on making money this year! 🎉
📌Submit Your Questions 🙋♂️🙋♀️
Have any other questions? Before asking me and my team, feel free to check out our Level 1 FAQ. This FAQ is located on the Dashboard. You might find what you're looking for. 😊
If you do have questions, make sure to ask them on our Dashboard, rather than asking us via email. We also encourage you to watch all of the core video content and some of the past archived videos, read past Membership Positions, and take all the quizzes before sending us your questions.
📌Join Our Discord 💬
Investing, trading, and building wealth was a lonely journey for me. This is why my team and I created a Discord group for you and the other members to shares ideas and support one another. You don't have to go through it alone as we're all here to help. 😉
Make sure to check it out on the bottom of your "Dashboard" and follow the instructions on how to sign up. Coming from a teacher's perspective, I believe it's important to engage in conversations with people who are also seeking to reach financial freedom.
Remember that we are a community of wealth builders at all different levels, so be positive, kind, and helpful to others, so we can help each other get to financial freedom much faster.
We wish all of you a wonderful holiday weekend! Thank you again for being a part of this wealth-building community. 🎄🎁
-Steve and the Call to Leap Team
The following article is strictly the opinion of the author and is to not be considered financial/investment advice. Call to Leap LLC and the author of this article does not claim to be a registered financial advisor (RIA) or financial advisor. Please visit our terms of service and privacy policy before reading this article.