How I’m Trading For A K-Shaped Recovery…
This might be a surprise to you, but the average household is doing O.K. financially. At least according to a study by Federal Reserve economists.
In a recent paper from the Federal Reserve Bank of St. Louis, Measuring Household Distress and Potential Policy Impacts, the economists noted…
“Anecdotal evidence suggests many households are struggling to meet their financial obligations (e.g., making loan payments). Yet housing markets and consumer spending have been strong, and personal bankruptcies and mortgage foreclosures are at multiyear lows.”
These two ideas seem contradictory. If you read much news, you have probably seen stories about the struggles of many households. If you read news on economic reports, you have seen surprisingly strong numbers.
The economists wanted to find the truth, so they created a Household Stress Index. The index combines 13 pieces of data into one, and tracks back more than 20 years. It closely tracked the experience of many families in the last recession, rising as unemployment increased and falling back to low levels only after an extended economic expansion.
Data from this index led to the data-driven conclusion that “the current level of household distress is below average compared with the past 21 years, which includes the Great Recession and its protracted effects.”
Source: Federal Reserve
Of course, there could be another explanation. It’s possible this is part of the K-shaped recovery I’ve been writing about since the end of 2020. As I’ve mentioned before, a K-shaped recovery is one where different parts of the economy recover at different rates.
With a K-shaped recovery, households in the upper line of the K do well as households in the lower half struggle. This would fit the seemingly contradictory pattern the Fed economists uncovered. That is an important possibility that I believe policymakers are doing their best to understand.
How I’m Trading Right Now
As investors, our task is less difficult. We just need to find stocks that can benefit from the both arms of the K-shaped recovery. That’s why I recently went back to place a trade on Lowe’s Companies, Inc. (NYSE: LOW), a stock we’ve profited from before.
LOW is a company that will help non-financially stressed households improve their homes. The stores will also help struggling households looking to save money by doing any home repairs on their own. That makes it attractive as a short-term trade.
My Income Trader Volatility (ITV) indicator confirms this. The chart below shows the ITV “buy” signal.
If you’re familiar with selling put options and how they work, this could provide a nice opportunity for a short-term income trade. You could sell a short-term put with a strike price of $160, which is below important support near $163 that should stop any decline.
Another strategy I’ve been pounding the table about the past few months is a strategy that works a lot like “insurance”…
By using this strategy, we get to not only protect our portfolio — but also profit by writing our own “protection policy”. It’s the best of both worlds… The immediate “premiums” we receive are a nice way to earn extra income, but it also protects us against potential downside in the market.
This strategy offers the kind of risk-reward profile that should be highly appealing in this market right now. So if you’d like to learn more about collecting “insurance” payments like this, go here now.