Stock-market investors are ‘living through 3 transitions’ and short-term volatility may be ‘gut wrenching’

This post was originally published on this site

© glyn kirk/Agence France-Presse/Getty Images

This is a unique period for financial markets, buffeted not just by a wall of worry but a trifecta of inflection points that could feed off one another in the coming months and is sure to deliver turbulence for investors.

That is the summary of the outlook for Wall Street offered by BTIG researchers in a report featuring chief equity and derivatives strategist Julian Emanuel and equity strategy associate Michael Chu.

“We’re living through three transitions which, in a period of elevated volatility, are reminders that the path to the long term is a series of short terms — often gut-wrenching, both down and up,” the BTIG strategists wrote.

The researchers said that the three transitions that the market faces are as follows:

Video: Debt fundamentals and dividends key for long-term investors, strategist says (CNBC)

Debt fundamentals and dividends key for long-term investors, strategist says
What to watch next

Indeed, they note that the transition to a new presidency under former Vice President Joe Biden, the market’s reaction to news of progress on therapies and prospective vaccines for COVID-19, and hoped-for rotations into beaten-down value stocks and out of popular technology-related names, remains a hornet’s nest of potential challenges that will require deft navigation.

Load Error

Read: Trump isn’t going quietly and fiscal stimulus won’t come easily, but investors have bigger things to worry about

The Russell 2000 index finished Friday trade at an all-time high, marking its first such record since August 2018, and achieved those plaudits by producing a dazzling spate of outperformance against its large-capitalization peers on the week. The Russell 2000 index rose 6.1% for the week, while the Dow Jones Industrial Average rose 4.1%, the S&P 500 index gained 2.2%, while the Nasdaq Composite Index declined 0.6% over the period.

Moreover, the popular value exchange-traded fund, the iShares S&P 500 Value ETF outperformed its Growth ETF counterpart, the iShares S&P 500 Growth ETF by 5.86 percentage points, marking its largest outperformance since March 2009 and its second-largest weekly outperformance on record, according to Dow Jones Market Data.

So how best to chart a path forward?

Emanuel and Chu recommend hedging growth risk by using “pandemic lows” opportunistically to buy puts for the Invesco QQQ Trust which tracks the Nasdaq-100 index of large-capitalization stocks. The pair also recommend selling calls and buying puts on the iShares Russell 2000 ETF for a collar, and judiciously looking to identify stocks that may benefit from further rotational shifts out of tech-related large-cap Nasdaq companies and into value-oriented small-caps.

Continue Reading