In my last post, we talked about the recent market swings and how they’ve impacted the S&P 500.
If you missed that, you can read it here.
Today, we’ll dive deeper into how the market’s recent volatility, especially in the Russell 2000, can give us hints about what’s happening more broadly in the economy and a strategy you can adopt to protect your downside.
What’s Going On with the Russell 2000?
Let’s start with the Russell 2000.
For those who might not know, the Russell 2000 is an index that tracks the performance of 2,000 small-cap companies in the U.S.
These smaller companies are often more sensitive to changes in the economy than their larger counterparts, which makes the Russell a good gauge of how the US economy is doing.
Just yesterday, the Russell 2000 had a big drop and went negative for the year, and that’s something worth paying attention to.
When small-cap stocks are struggling, it can be a sign that economic growth is slowing. But here’s the thing: while this might sound alarming, it also opens up some opportunities. Just look at the bounce today for evidence of that.
The key takeaway is that is that if small caps are struggling, they make up a huge base of employers in the US, so a lot of layoffs from small caps could both be a sign of and help kickstart a wider economic downturn.
A lot of the market’s current jitters are tied to economic indicators, like Friday’s weaker-than-expected jobs report and the Fed’s chatter about interest rates.
Going forward, it’ll be key to keep an eye on what developments we see out of these.
Protecting Your Downside
One thing I like to do — and if you follow Tom Busby, he does this as well — is to buy what I call “pocket puts”.
I’ll go out looking for out-of-the-money puts expiring 3 to 4 months from now that I can pick up for about $1.
And when you have something like what happened yesterday, those puts can end up making you a ton of money.
But you have to be aware: Buying puts like this is like buying insurance. It’s the kind of thing you spend real money on in the hopes that you’ll never have to use it.
Lots of times, just like with car insurance or what have you, you’ll pay your premium and never use that insurance.
So you have to get comfortable with spending money on something that you might not use.
But again, when days like yesterday happen, those will pay out handsomely.
Going Forward
The key thing to know is that markets generally overreact to everything. Just look at the bounce we had since yesterday.
What I’d be looking at going forward are opportunities to buy.
I’ll talk more about that tomorrow.
— Geof Smith
P.S. Have you seen my Oklahoma Trade? It’s a brand-new strategy I’ve developed to target weekly income from one of the most rock-solid assets out there. This kind of thing is perfect in all markets, but especially when we see volatility like we’ve seen recently. Check it out here.
