Options: 5 Reasons to Beware of the Bear Market

Posted On October 22, 2018 2:52 pm
By: Steve Smith

How Higher Rates Hurt

The near zero rate environment of the past 6 years had created the TINA (There Is No Alternate) helping fuel the bull market as investors were forced in stocks to seek yield.

But with 2-Year notes now yielding 2.5%, many wealth managers can now move client money into fixed income without feeling foolish — meaning they are selling stocks to make this reallocation happen.

A more detrimental aspect of rising rates is that companies with weaker balance sheets that were able to borrow (and basically stay in business) are starting to default on loans.

Last week, Bank OZK (formerly Bank of the Ozarks), blew up after reporting earnings that contained two shockingly large write-offs that were tied to commercial loans for construction projects – the kind of projects you see underway in cities and states all over America, such as skylines filled with cranes revitalizing downtowns, business districts, and millennial-friendly urban spaces everywhere.

George Gleason, the Chairman & CEO of Bank OZK, predicted that there will be more to come, and the stock immediately lost 25% of its market cap. This brings us to housing. You can see the U.S. Home Construction Index (ITB) — which had been underperforming for most of the year — went into an absolute free-fall late September. This happens to be when 10-year interest rates crossed above the psychological 3% level, and quickly rose to 3.25%.

Source: stockcharts.com

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Tagged with: options trading

About author

Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.