This past weekend, I had a chance to talk to a friend who's been trading financial markets for more than 30 years. When asked what he thought of the current market, he said it felt a lot like 1998.
More on that in a moment...
First, let me take everyone back to the year in question. "Titanic" had just been released... The Denver Broncos upset the Green Bay Packers to win the Super Bowl... Microsoft was the largest company in the world... and Bill Clinton was denying he ever had "sexual relations" with a former White House intern.
There was certainly a lot going on in the news... and the stock market wasn't going to be left out, as you can see in the chart below (showing the Dow Jones Industrial Average for 1998).
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The most interesting part of the chart is the decline we experienced that summer, created by credit market and currency crises around the world, in Denmark, Russia, Thailand and others. Hedge funds had become highly leveraged in illiquid markets. They were enjoying great returns, but seemed to forget about exit strategies. This led to a liquidity crisis among the funds and a selloff in global stock markets.
So, back to my friend. When I asked him why he thinks the current market feels like 1998, he pointed out that individual investors are trading in illiquid markets and don't seem to understand the risks. One major market that could be facing liquidity issues is bond exchange-traded funds (ETFs). These ETFs hold hundreds and even thousands of individual bonds, many of which are thinly traded.
Bonds lose value when interest rates rise, which could lead to selling this summer as investors seek to protect capital. A large sell order from an ETF could trigger a crash in one of those credit markets, which could spread quickly to other markets and set off the type of cascade selling we saw in 1998.
And that's just one of many risks to keep your eye on this summer. In 1998, no one seemed to understand that a currency crisis in Thailand could contribute to a chain of events that would lead to a crash in U.S. stocks. Likewise, in 2008, no one seemed to understand that the failure of two small Bear Stearns hedge funds could be pointing toward a larger financial crisis.
Now, in 2018, there are too many crises to name.
There's North Korea, of course. But there's also a potential trade war with China. And a new currency crisis in Europe, led by Italy.
In South America, Argentina's currency is crumbling while strikes in Brazil are creating unrest. And Venezuela could collapse at any moment. This level of economic and social disorder could (and often does) result in a refugee crisis, like we saw in Europe a couple years ago.
Now, imagine a refugee crisis at our southern border. I won't hypothesize further about that... but combine economic collapse in nearby countries with political flash points in the United States, and you can quickly see the setup for a stock market crash.
But there is good news. Crashes tend to come when technical indicators are bearish, and that's still not the case today. However, I am watching for signs of deterioration and remain focused on risk.
That's why I recently recommended a trade to my premium Income Trader readers from a stock that's delivered winning trades for us in the past -- five times, in fact.
Finding Income And Safety From A 5-Time Winner
The company is drug giant Abbvie (NYSE: ABBV), which is best known for Humira, the rheumatoid arthritis blockbuster.
Humira explains the company's strong performance over the past few years. The company generated $28.22 billion in sales last year, with $18.4 billion coming from Humira, the world's best-selling drug.
But Humira can also drag the stock down when traders worry about what will happen when the drug eventually has to face competition.
Those worries are more about the long term because Americans probably won't have access to cheaper biosimilar versions until 2023. That's why AbbVie confidently predicts annual Humira sales will climb to $21 billion by 2020.
The company attributed 2017's strong gain to increasing patient populations and price increases, not a gain in market share. With insurers and pharmacy benefit managers pushing for savings, it may be difficult to continue growing Humira sales with price increases alone.
ABBV is preparing for that by developing other drugs. In a recent presentation to analysts, the company said it could see more than $35 billion in risk-adjusted sales from non-Humira medicines in 2025, and as much as $47 billion if things go especially well.
However, it's hard for everything to "go especially well," and the company has already experienced a stumble.
You see, a key component of that 2025 forecast is Rova-T, a cancer medicine that came with AbbVie's $5.8 billion acquisition of Stemcentrx in 2016. AbbVie has suggested peak sales of the drug could reach $5 billion. Unfortunately, the drug fared poorly in a Phase 2 lung-cancer trial. More data from other trials is forthcoming, but there's a possibility the company may have to write off the acquisition. This led to the stock's recent sell off.
A large portion of AbbVie's ex-Humira growth relies on yet-to-be approved next-generation inflammation drugs upadacitinib and risankizumab; the company believes they have the potential to combine for $11.5 billion in 2025 sales. Both drugs will have to be extraordinarily successful in several very crowded and overlapping markets if they're to come anywhere near those expectations.
Long-term investors will need to follow these trials closely. But as short-term traders primarily focused on income, my Income Traders and I need only concern ourselves the near-term outlook.
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How I'm Trading This Stock
The stock has been recovering from its sell off and is likely to remain in a trading range until news is announced. The next milestone for ABBV will most likely be in July, when its next quarterly earnings announcement is scheduled.
That's why I'm recommending a trade to my Income Trader subscribers that expires in June, which minimizes the risk of a steep selloff. Assuming ABBV trades for $96 or more on June 15, we keep the premium and make a profit of $50 on $1,920, or 2.6%, in 17 days. If we can repeat a similar trade every 17 days, we will earn about 33% on our capital in 12 months.
How do we do this? Easy -- with a high-income, short-term put option on ABBV.
Now, I can't give away all the details on this trade -- that just wouldn't be fair to my subscribers. And I understand not everyone is comfortable selling options, but you shouldn't let that fear or nervousness keep you from taking advantage of this tool. They can be as risky or conservative as you want them to be. It all depends on the strategy you're using.
My strategy is one of the safest around. In fact, I'm making a guarantee to new subscribers to show how low-risk options can be...
If you follow along with my trades and don't make money at least 90% of the time... I'll work for you for free. That's how confident I am.
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