How to Turn Market Volatility into Profits
I’m predicting a volatile year ahead for the stock market.
So what should we do? Sit on the sidelines?
Absolutely not!
In my latest video, I’ll reveal the secret to using volatility to your advantage…
So you can turn it into profits.
For a full transcript of this video, see below.
How to Turn Market Volatility into Profits
Welcome to Moneyball Economics!
I'm Andrew Zatlin.
And in case you're wondering [Zatlin strokes chin]… no, I didn't lose a bet and have to shave my goatee.
And no [Zatlin chuckling] — my sudden hair loss isn’t an expression of “taking a haircut” in the market.
Although given yesterday’s crash, that’s a natural conclusion.
Instead, I shaved my goatee for the opposite reason:
I'm celebrating!
How come?
Well, as you might recall, we recently took a trading position that anticipated the exact situation we’re in right now.
In fact, if you've been watching my videos for the past few weeks, you know that my #1 trading theme for 2022 is interest-rate normalization.
And that's exactly what we’ll talk about today.
Specifically, we’ll address:
- Why the markets collapsed Wednesday.
- What it means for interest rates and the markets going forward.
- And how to change the way you’ll be trading in 2022.
This last topic is especially important because it has huge implications…
Not just with respect to where you’ll be investing…
But also about how you’ll be investing.
A Wacky Wednesday
To kick things off, let's talk about Wednesday’s sell-off.
On Tuesday, I told you to expect a lot of volatility in the markets this week.
You see, multiple data reports related to the jobs market are being released, and they’re likely to impact interest rates.
But this situation is turning out to be straightforward…
Essentially, what’s happening is that good news is becoming bad news.
Here’s what I mean…
Changing Course
On Wednesday, the Fed came out and — no surprise — it spoiled the party.
To back up a second, it’s important to understand that the stock market is at an inflection point.
Here’s what I mean:
If you’ve ever been on a boat, you know that when you shift direction and go against the waves, it gets choppy.
That's what we're going through right now. We're changing course and things are getting choppy.
I believe there's still reason to be bullish in this market. But we can't be out there fishing with dynamite — throwing money at the overall market and expecting its value to go up.
We have to be more selective…
And that's what we're going to take a deeper look at as we explore what's driving the market down.
Fed Gets Involved
For starters, let’s look at what the Fed did that surprised the market.
First, it said it has to change the timing of its interest rates hikes.
Everybody knows rates are going up. But there's been a debate as to when.
So the Fed said, “The clock is ticking. We’re down to two months.”
Second, it sent a message about the pace of these changes…
Essentially, it said the pace of “normalization” will be a lot faster.
And this news really shook the bond markets.
The last time we were in a similar situation after the Great Recession in 2009, the Fed took two years to normalize rates.
But this time, the Fed is moving faster — and that means rates will be moving up sooner.
The markets don't like that.
Good News Ain’t So Good
So on the one hand, you've got economic slowdown…
And on the other hand, you’ve got the Fed saying, “We're going to raise rates faster.”
Put these two “hands” together, and you’ve got a clash!
In any case, the markets weren't expecting a clash.
So now we're in a place where good news is considered bad news.
This week, we've been seeing a string of good news. And the markets haven’t been reacting well to it.
For example:
- ADP reported that payrolls are shooting up again.
- The U.S. Challenger Job Cuts report indicated that the number of people being laid off is at an historical low.
- And today, we’ll have payroll data, and we’ll probably get another strong payroll number.
Simply put, it's been a steady string of good news. Reports of a strong economy, strong hiring data, strong wage inflation — it all supports the Fed’s moves.
So let me ask a side question:
Why do rate increases trigger such a big sell-off in the stock market?
Well, there’s a lot of speculation as to why this is the case. But let me give you the real reason…
It has to do with leverage.
In other words, it has to do with the way portfolio managers at hedge funds invest.
What The Heck is Leverage?
Basically, leverage means debt. It means hedge fund managers are borrowing money.
Why would they do that?
Well, let's say I'm a hedge fund manager, and I'm managing a billion dollars.
I might go to the bank and say, “I've got a billion dollars I'm managing. Give me another billion.”
In this instance, I've leveraged up. I've got my billion, and I've added a billion more.
So now I'm trading with $2 billion.
If I put $2 billion into the market, and the market yields 10%, that’s $200 million in returns.
Now, you might see 10% and think, “Big deal. How is 10% considered a great return?”
Well, it's because that $200 million return came from the original $1 billion investment.
In other words, I actually made 20% returns!
But When Rates Go Up, this Trade Falls Apart
Sure, those profits are before I pay back the money I borrowed, plus interest.
But the fact remains — if interest rates are low, this trade works great.
But when interest rates move up, this trade falls apart!
So the flow of money into the market goes down.
And that’s why, my friends, that when rates go up, it’s bad for the stock market.
Already Up 40%
What does that mean for us?
Well, earlier, I told you that my #1 investment theme for 2022 is getting positioned for rate hikes.
In fact, this is why I shaved my beard.
Let me explain…
The trading position I’ve been recommending is up almost 40% since we got in about a month ago.
We are doing really well, and I'm going to keep that position open.
And that's why I shaved.
I’m going to let my beard grow until we exit that position.
So let's see how long my beard gets!
It's really a celebration. We are specifically positioned for this interest rate hike.
And by the way, if you're a subscriber who followed my recommendations — congrats!
An Up-and-Down Road Ahead
So, what should we be doing going forward?
Simple: stay bullish.
Because I think we should see about 10% market growth this year.
The thing is, this growth isn’t going to be a straight shot.
It's going to be up and down, up and down. We're going to see more of this volatility.
That means more violent moves — 1% and 2% dips and jumps in the overall market.
But keep in mind — for individual sectors and stocks, that 1% or 2% change will be a lot more pronounced.
That’s why, as I stated earlier, there can be no more fishing with dynamite.
We can't just put our money in and expect profits to come out.
Things are going to bounce around a lot more…
And that means you'll have to be a more active trader.
So when things overshoot to the downside, you want to have your targets ready. You want to have your picks ready, because you’ll be presented with more “buy” opportunities…
And that's where you're going to make more money.
If the overall market is down 10%, there will likely be some days when your target positions will be down even more than that. So that 10% return opportunity could wind up being 15% or even 20%...
But the only way you’ll earn those returns is by being an active trader.
That means you're looking for those sell-offs to buy. And you're looking for the surges to sell.
And that’s the other thing you want to look for:
When the markets are hot, you want to have a long-dated “short” position on the market overall, so you’re prepared for a sell-off.
Again, you won’t be able to take advantage of these opportunities unless you're actively trading.
You need to get into the mindset that you know there's going to be a sell-off within a month or two of the market being “hot.”
And you’re going to wait for it, look for it — and you’ll sell when it happens.
That's how you're going to create your returns this year!
In It to Win It
Bottom line: most stocks won’t go up much this year.
So you've got to focus on volatility — and make it work to your advantage.
With that in mind, look for my beard to grow a whole lot longer.
In the meantime, let's make some money…
Because we're in it to win it!
In it to win it,
Moneyball Economics