Eight of the largest 20 one-day downturns in the Dow’s history have occurred in October.
As a result, most people think that October is the worst month of the year historically.
It turns out, it’s not.
This month is.
Here’s how we take advantage of it.
And away we go, huh?
The last four days have established a downtrend in the S&P 500, and momentum is NEGATIVE.
It’s the first time that momentum switches have gone negative since… February.
I discussed this over the week in my Family Portfolio recap. It’s not surprising that there is so much uncertainty about the current state of the market.
Afterall, September – the month football returns and we all need to get our flu shots – is the worst month of the year historically.
And it gets worse during election years.
But let’s ask a really important question.
Why is September the worst month of the year for the market?
There are people who will tell you that it has to do with elections… or football distractions… or some bizarre metric of volatility that they invented.
The real answer: I don’t know.
Nobody knows. They’ll want to come up with a reason.
But a reason DOES NOT HELP YOU.
It’s entirely random, and the current state of the market is dictated by what is right in front of us.
So, let’s look at the factors that we’re dealing with as we approach the final week of the year.
What’s on My Mind?
For another eight days, we are still in the least magical month of the year for the stock market.
That said, I didn’t have “Supreme Court nomination fight” on my Bingo card for 2020.
But the passing of Ruth Bader Ginsburg has sucked all the oxygen out of the D.C. air.
How anyone hasn’t passed out from all of the hyperbolic statements about our future, I don’t know.
However, I do expect that the likelihood of Congress extending new stimulus checks to Americans right around Zero Percent.
So too is the rise of COVID-19 in places like the United Kingdom, Europe, and DOZENS of states across the United States.
Those headlines will move markets.
Again, there is little to nothing we can do about the headlines.
I supposed we could crawl under the table with a bottle of bathtub gin and try to stay blasted until the election ends and COVID lasts.
But that won’t make you any money.
Loving Down Markets
I talked not long ago about learning to love down markets.
Guess what yesterday was?
And what this week is going to look like.
Whether the downward momentum trend continues largely will depend on the Federal Reserve over the next few weeks.
But I am welcoming the downward momentum as an opportunity to sell calls to generate income on stocks I own.
Collecting cash during bad markets takes some of the sting out of the decline.
In the long run, it can add several percentage points to your returns. Look through your portfolio and find price points to sell out of the money call option on the stock you already own.
I also want to sell puts on stocks that I want to buy and hold for the long term.
Now let’s start looking at some of the great tech stocks you missed on the way. The downward pressure on stock prices combined with volatility is going to juice the price of put options.
What are the great tech stocks that I’d want to buy? Amazon (AMZN), Microsoft (MSFT), Cisco (CSCO)?
All of them have listed put options.
Look for support points and sell cash-secured puts. This not only allows you to collect more cash, it creates an entry point in a stock you love at a lower price.
So do all those high yielding blue-chip stocks you have wanted to buy on a pullback. This is a pullback. You can sell puts to buy shares cheaper and collect some cash.
For example, we can look at a company like Apple Inc. (AAPL).
This is one of the world’s leading tech stocks and a staple of many winning portfolios.
With volatility rising, I can look at the October 30, 2020 options chain and see that I can sell the $100 put for more than $3.00.
That means, over the next 38 days, AAPL stock would need to fall another 12% for me to breakeven on the trade (at just under $97 per share)
Apple is already down 20% from its near-term highs.
And since this is a stock that many people would love to own, you could sell one contract for $325.
If the stock doesn’t fall under $100 per share, you’ll pocket the cash.
If it does fall between $97 and $100, we’d be able to snap up 100 shares per contract, pocket that premium, and get shares of a stock we want to own.
And, if the stock does fall under $97, it might feel like a losing trade. But it would allow me to pick my entry point.
Now, this is hypothetical. But it’s exactly what I do with my Family Portfolio on a regular basis. In fact, I’m about to make two trades very similar to this.
The Bottom Line
There is no point in wasting time on the part of this we cannot control. Big down moves are like a big sale at the grocery store.
We need to focus on what we can control. We can collect cash by selling calls on stocks we own and puts on stocks we want to own.
We can change our attitudes. Long term is a long time from now.
Today’s small loss is nothing when compared to the decade’s potential for massive gains.
There are companies that are changing the world as we speak, and we get to buy shares on sale.
We’ll talk again on Friday,