What The Heck Is Going On In The Market?
By Amber Hestla | October 25, 2018 |

I want to start this week by answering the question that's on everyone's mind...

"What the heck is going on in the market?"

To do that, we need to start by looking back. In particular, I want to review the busy-looking chart below.

This is a chart of the Invesco QQQ Trust ETF (NASDAQ: QQQ) -- an exchange-traded fund that tracks the tech-heavy NASDAQ 100 index -- during the lead up to the dot-com crash. As you can guess, the NASDAQ 100 was at the center of the bubble in 1999.

The vertical red line marks the day when QQQ topped out following a huge run that saw the price climb about 150% in the previous 12 months. In hindsight, that overall 150% gain is what we remember. But in real time, it was difficult to hold stocks, even as prices soared.


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The blue lines mark all price moves of 10% or more. Red numbers count the number of declines in the year before the top. In total, there were seven declines of 10% or more in just 12 months.

Bears proclaimed the end of the bull market in each selloff. Bulls looked at the declines as buying opportunities. In the end, both were right -- the bulls made a lot of money buying dips, until the dips ended. Then, the bears made a lot of money.

I've thought a lot about this chart while watching the market action over the past week. We had a large decline in a short amount of time. Stocks were overvalued when the decline began, and they remain overvalued even after the selloff. Bears are proclaiming the end of the bull market, and they might be right.

But, in my opinion, it's more likely that we're positioned for a volatile period in the stock market. I am looking for more declines in the weeks ahead, as well as more rallies. I believe we are heading for an important top, but the run-up to the top will be exciting.

So, here's my advice: Hang on for now and wait for prices to decisively turn down. Don't let brief declines shake you out. If you had done that in 1999, you would have missed out on what ended up being the best part of the bull market.

Here's What We're Trading Right Now...
As option sellers, my Income Trader subscribers and I are in a good place. Pullbacks will increase volatility and push premiums on options to a higher than average level.

That's the case with our new trade in Lululemon Athletica (Nasdaq: LULU). While shares of this athletic retailer are volatile, they're likely to trend higher until the company's next earnings report, which is due in December.

Lululemon is known for making yoga pants, or "athleisure" clothing. The company actually started in a yoga studio when founder Chip Wilson decided cotton sweatpants weren't the best attire for sweaty, stretchy yoga classes. He began developing clothing made from "technical athletic fabrics" in 1998, and the business has grown dramatically since then, topping $2.9 billion in sales over the past 12 months.

In addition to yoga pants, LULU sells other athletic gear—shorts, tops, jackets, socks, etc.—for both women and men, and loyal customers can frequently be seen carrying branded bags, water bottles and yoga mats.

The chart shows the reason for my bullishness in the short run. LULU sold off with the rest of the stock market last week. The decline ended right at an important support level, which is marked with the dashed blue line in the chart.

Shares found support around $140 -- the same level the stock traded at before its last earning report (released on August 30). Following the report, which showed the company widely beating earnings estimates, the stock jumped.

The market's recent steep decline has boosted options premiums and set up an unusually low-risk trade. The November $125 option offers significant income, and the strike price is almost 15% below the current stock price. Without significant news, the probability of a decline of that size is low.


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If I'm right, then my subscribers and I will collect income right away from LULU and the trade will expire on November 16. After that, we'll be free to move on to another high-probability income trade and keep collecting income week after week.

But even if I'm wrong, we'll not only keep our income, but we'll also have the chance to buy the stock at a 14.1% discount. As I always tell my subscribers, that's about as close to a win-win as you can get when it comes to investing.

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This article originally appeared on StreetAuthority.com.

 

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