Stock market investors ‘go through 3 transitions’ and short term volatility can be ‘heartbreaking’

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This is a unique time for financial markets, rocked not only by a wall of worry, but by a trio of inflection points that could feed off each other in the months to come and are sure to be missed. not create turbulence for investors.

That’s the summary of the outlook for Wall Street presented by researchers at BTIG in a report featuring chief equities and derivatives strategist Julian Emanuel and equity strategy partner Michael Chu.

“We are going through three transitions which, in a time of high volatility, remind us that the path to the long term is a series of short terms – often heartbreaking, both down and up,” wrote the strategists of the BTIG.

The researchers said the three transitions facing the market are as follows:

  • Politics: Joe Biden is scheduled to be inaugurated on January 20, 2021.
  • Viral / Societal: News on the coronavirus vaccine gives the world hope that “normalcy” will return by the end of 2021.
  • Stylistic: Growth rather than value

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

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The Russell 2000 Index closed trading at a record high on Friday, marking its first such record since August 2018, and garnered that applause by producing a surge of meteoric outperformance against its large-cap peers this week. The Russell 2000 RUT Index,
+ 2,08%
rose 6.1% over the week, while the Dow Jones Industrial Average DJIA,
+ 1,37%
rose 4.1%, the S&P 500 gained 2.2%, while the Nasdaq COMP Composite Index gained
+ 1,02%
decreased 0.6% over the period.

In addition, the popular value exchange-traded fund, the iShares S&P 500 Value ETF IVE,
+ 1,94%,
a surperformé son homologue Growth ETF, l’iShares S&P 500 Growth ETF IVW,
+ 1,07%,
by 5.86 percentage points, marking its strongest outperformance since March 2009 and its second-largest weekly outperformance on record, according to Dow Jones Market Data.

So how can we best chart the way forward?

Emanuel and Chu recommend hedging growth risk by opportunistically using “pandemic dips” to buy puts for the Invesco QQQ Trust QQQ,
+ 0,87%,
which follows the Nasdaq-100 NDX index,
+ 0,93%
large cap stocks. The pair also recommends selling calls and buying puts on the iShares Russell 2000 ETF IWO,
+ 1,46%,
for a necklace, and judiciously seeking to identify stocks that could benefit from further rotational transfers from large-cap technology-related Nasdaq companies to value-driven small caps.

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