No one can accurately predict whether the Middle East conflict will spark a much larger war that sends stocks sharply lower. That makes financial markets even more difficult to forecast.
Yet all investors recognize this fact: Stocks rise over time, and certain seasonal factors tend to occur each year. By focusing on these facts, rather than trying to make short-term predictions, investors can create favorable conditions for themselves when none seem to exist.
In November, trading flows often turn cautious as institutional investors focus on their year-end bonuses, which constitute the bulk of their compensation. This makes them less likely to embrace risks because they don’t want to jeopardize that.
By January, however, many of those same investors, as well as many nonprofessionals, become more optimistic. They often return to the markets from the winter holidays far more eager to buy stocks than to sell them. The reason is elemental: It’s a new year, and most investors, like most people, are optimistic by nature.
January also happens to be one of the biggest months in the investment marketing calendar. Strategists heavily promote their 2024 market outlooks, which invariably include stock recommendations. Everyone will make reasoned, optimistic predictions in published commentary and at in-person events. The pushback against the recommendations is minimal, if at all, because the new year is beginning and there is a sense that anything is possible.
If many investors are sitting in cash and not buying securities, the Wall Street bull chorus might be unusually loud this January. The Street, after all, doesn’t really make any money from investors holding cash.
Anyone who feels compelled to invest in stocks should focus on companies with powerful fundamentals. Consider
Microsoft
(ticker: MSFT). The market-leading stock offers exposure to two important themes: cloud computing and artificial intelligence, which are revolutionizing how people work and live.
Microsoft is one of the few
S&P 500
stocks that have led the market higher this year. A lot of investors are concerned that major technology stocks have advanced too far given these unforgiving macro conditions, but it is hard to see valuation concerns dramatically damaging Microsoft’s stock momentum because of the company’s strategic position.
Investors who agree can consider a hopscotch options strategy that is intended to benefit from current fears that the stock is due for a short-term pullback and from expectations that investors will turn bullish again in January.
With Microsoft’s stock at $338.11, aggressive investors can sell the November $320 put option for about $2.12. A cash-secured put sale positions investors to buy the stock at an effective price of $317.88.
The trade’s risk: the stock plummets below the strike price, obligating investors to buy the stock at the $320 strike price or to adjust the trade to avoid assignment. Only consider the move if you are willing to own the stock for three to five years.
In anticipation that bearish fears turn to bullish greed, aggressive investors can sell Microsoft’s January $325 put for about $9.50 and buy the January $350 call option for about $11.10.
The risk-reversal strategy—selling a put and buying a call with a higher strike price and the same expiration—positions investors to buy the stock lower and to benefit from any rallies. During the past 52 weeks, Microsoft’s stock has ranged from $213.43 to $366.78.
The strategies are intended to provide investors with definable risks, and potential rewards, when the world and markets are dangerous. Time, and smart technology, heal many wounds, no matter how deep or violent.
Email: editors@barrons.com
Read the full article here
