This Always Happens Before Stocks Fall

Added: 2026-05-12

[00:00:00]Hey, bow tie nation. Joseph Hog with your weekly stock market update. Sundays at noon before the week starts with the stocks to watch and the stock market news you need to see. And nation, the stock market just flashed a warning signal that has always preceded a drop in stocks. It's not earnings, not the Fed, or some right half the time Wall Street indicator. It is one number, 5%, because every single time it's crossed this pain line over the past 5 years, stocks have cracked. Sometimes it's a 2% drop, sometimes it is 10%, but it has happened every single time. And that trigger happened again last week. I'm going to explain why and show you the investment I made that could double my money and protect me from the stock market sell-off. Stick around and I'll update you on shares of Arista Networks, ticker A&E, Soundhound AI, SU, and one of my favorite cyber security stocks up over 30% last week alone. First, under that big market trigger, though, because even though I believe stocks are a great long-term buy right now, and even detailed that last week on how the overall market is cheaper than it's been in years, last Monday saw a trigger that has pushed stocks lower every single time over the last 5 years. On Monday, the rate on the 30-year US Treasury bond passed 5%, a point it has only crossed just four times in the past 20 years, October 2023, then three times last year in January, May, and July. And every time Uncle Sam's long-term debt costs have passed this point over the last five years, every single time, stocks have taken a short-term hit. In fact, it's been so reliable that it's been dubbed the market's pain line. In October 2023, investors were worried that the Fed would keep rates higher for longer and sent stocks on the S&P 500 down 5% in just two weeks from that painline. In January of last year, even before the April tariff crash, the Treasury hit that 5% trigger on fears of coming inflation and sent the tech heavy NASDAQ down 10% into March. Again, before any of the tariffs, made it even worse. And in May, it was inflation again, pushing the rate above 5%, but the market still had a lot of upward momentum. This time, it only fell about 2 and a half% from that painline trigger. And finally, then in July, stocks gave back another 2% in just over a week. Now, in each of these instances, stocks did end up rallying soon afterwards when those rates came back down. But that painline has been such a clear signal that it's almost a self-fulfilling prophecy at this point.

[00:02:22]And this isn't all just coincidence or or market psychology. Higher interest rates mean tighter financial conditions, higher costs to consumers and business borrowing. That means a weakening economy. And the economy is already showing signs of cracking. growth of just 2% in the first three months of this year, up from last quarter, but less than half the growth we saw last year. Higher interest rates also mean a lower valuation for those high growth stocks where those future cash flows are the big driver of share price. In models like the discounted cash flow, the DCF, you discount those future cash flows back to a present value using an interest rate to estimate the fair value for a stock. Higher rates means higher discounts and a lower present value, which is why we saw those tech stocks crash when the Fed raised rates in 2021.

[00:03:07]Interest rates jumped after the Iran war started late February and hit that 5% trigger last week on the fear that those higher oil prices would push inflation, keep the Fed from lowering its interest rates. Between that and the Treasury continuing to pump out bonds to pay for this country's $2 trillion deficit this year alone, it was only a matter of time before that debt came back to the market's attention and 30-year rate past 5%. Now again, nation stocks are still attractively priced and longer term should do well into the end of the year.

[00:03:36]But when the market has its best month in 5 years and stocks surging almost 9% in the last month alone, doesn't take much to push investors into taking profits. for one of those 5% corrections we get nearly every year. But I found a way to benefit in just about any scenario we see from this. The iShares 20 plus year Treasury bond ETF, the TLT, holds over $40 billion in long-term treasury bonds and pays a 4.5% dividend yield. Since bond prices go down when rates go up, the value of that ETF is like the opposite of those interest rates. When rates came down briefly in February, the TLT ran almost 5% higher.

[00:04:13]But then when rates jumped back, that bond fund fell. But then there's a reason why interest rates aren't likely to stay high and why the short-term protection that I'm going to show you next wins in multiple scenarios.

[00:04:23]Scenario one here is that stocks fall as they've done in the past. That brings back fears on the economy and interest rates come back down on that, also as they've done in the past. That could see the TLT back up to as high as 90 a share where it was in February. A 4% return plus shielding you from that stock selloff. Scenario two is stocks flatline or even keep heading higher, but those rates could still fall. Any progress on a permanent ceasefire in Iran would bring down those inflation fears. And even though Chair Powell has vowed to remain at the Fed, his tenure as chairman is up on May 15th. That brings in Chair Wars, and a clear preference for rate cuts, which would likely bring current rates down in anticipation.

[00:05:02]About the only negative scenario is if inflation continues to spike and the war in Iran heats up on an escalation. That could see the TLT back down to $85 a share. But hell, that's only a 1% drop against what would be at least a 5% plus plunge in stocks on those renewed fears.

[00:05:19]Now, you know me though, I'm not content with just protecting my portfolio and getting a 4% yield while I wait. I set up a call spread option strategy late last week, buying the July $85 strike calls and selling the $87 call options.

[00:05:33]I'll walk you through this next, but what it comes down to is with a cost of just 96 cents per share on 300 contracts, that's 30,000 shares of the TLT, I'll make over $31,000 in 2 months if the TLT recovers to $87 a share into mid July. And I'm already up over $3,500 on the strategy in the last few days of the week. The thinking here is because interest rates likely fall over the next few months on just about any scenario that TLT should recover. So, we want to buy call options that give us the right to lock in a price now, but I also want to offset some of that cost for those call options. So, while I bought the options for an $85 strike price for $1.95 each, I also sold the $87 strike options to collect $99 each and reduce my overall cost. Now, with the TLT up a little past $86 each by the end of last week, I'd probably use the $86 and the $88 call options if I were just starting. On most investing sites, that means you buy to open the July 86 call options and then sell to open the $88 calls. This is going to show you that midpoint difference, which as of Friday was a cost of $85 a share. That means if the TLT goes above that $88 a share on that expiration mid July, you'll collect $2 per share or a profit of $135 in just 2 months. Now, understand this strategy is a hell of a lot more risky than just buying the TLT for that short-term protection and the 4% dividend yield. On an 85cent cost basis, you break even at $86.85 per share on the TLT and lose all your investment if it falls below that $86 each by mid July. But if rates do fall back lower, I think the TLT goes well over $88 a share where that spread maxes out. And I know it's a lot of options jargon, but nation, if you are not using these options not just to boost returns, but also to reduce risk and create income, you're missing out on one of your best tools. I asked the bow tie nation out there how they've been using our options investing course, and was blown away with the response. George made over $26,000 buying the $30 call options on SMCI, a 315% return in 2 weeks. Justin made a 380% return on a call option strategy in one week. Then there's longtime bow tie brother Chad generates over $10,000 in income regularly each month across five stocks from Amazon to Alibaba and Nvidia. To help you get started, I'm relaunching our ultimate options course. Over 3 hours of video, I start with the basics, then walk you through 29 option strategies, when to use each, and how to set it up, including a real world example with Shares of Tesla. The course also comes with a one-of-a-kind strategy finder to help you find the right option strategy and an options calculator to show you exactly what to expect. Right now, I'm relaunching the course at a 38% discount. Save $150 off. You're going to get all the basics to get you started, the strategy finder to make sure you're using the best strategy, the options calculator to show you exactly how much money you can make, walkthroughs on all 29 strategies, and a 14-day money back guarantee. And that $150 launch discount is only available with the coupon code in the link I'll leave in the description or just scan the QR code here. Now, looking at the stocks I'm watching this week, cyber security stocks jumped last week with Fortnite, ticker FT& up more than 30% after the company reported earnings and revenue that beat expectations and increased its fullear billings outlook to as high as $9.1 billion from an earlier guidance of 8.6 billion. Now, I've been loading up on cyber security stocks since last year and have added more since those fears of AI is going to replace software. Just over 333,05 names. That's Crowdstrike Holdings, CRWD, Palo Alto Networks, PW, Fortnet, Zcaler, ticker Zs, and Octa, OKTA.

[00:09:16]Fortnet's report proved what I've been saying, that AI is increasing cyber security demand rather than eating away at it. And there's still value left in these names. We won't see earnings from the rest until later in the month, May 26th and 28th for Zcaler and Octa. Then June 2nd and 3rd for Palo Alto and Crowdstrike. Now Crowdstrike and Palo Alto are probably the safest of the group and are working with Anthropic in its Mythos model to stop those hackers.

[00:09:42]Zcaler and Octa may have the highest return potential, but are also the higher risk. Celebrite DI ticker CLBT reports earnings Thursday already up 9% from highlighting in a video two weeks ago on the software companies safe from that AI implosion. Celebrate is locked into the law enforcement community serving over 7,000 stations and agencies with the software used in more than one and a half million investigations last year. That is not something you replace easily with just generalized AI software and the company should be able to maintain its 20% pace of growth. I would like to see a little stronger earnings growth, but the shares are still good value on a stock that has been thrown out with those software fears.

[00:10:20]Soundhound AI, ticker sun, fell almost 10% Friday on its earnings report. So, I wanted to update on my position.

[00:10:27]Earnings were overall very good and keep it on track for growth with revenue up 52% from the last year to $44 million and beating estimates. Now, what investors didn't like was the wider earnings loss of $26 million versus an expectation for just $12 million loss.

[00:10:42]Management chalked this up to a heavy investment and acquisitions period and reaffirmed its revenue as high as $260 million for this year, which would be a growth of 53% from last year. Their shares are well off their $22 peak from last year, but still more than double when I started buying around $4 per share. This company still has a very strong position in that future of voice AI. And despite the dip, the stock is up 29% from its recent lows after a short squeeze when the company announced its live person acquisition and that it could boost revenue to as high as $500 million next year. Management reiterated that last week, which means it could be looking at revenue growth of 100% next year and possibly bring it back into profitability. Arista Networks ticker A&E also fell last week, dropping 17% on its earnings, though still up 42% from when we started buying last June. Now, I warned last week that even strong growth in one of my favorite AI data center themes might not be enough for this runaway valuation here. It's exactly what we saw in earnings. Arista reported revenue up 35% to $2.7 billion, beating expectations for both sales and earnings. The problem here besides just that the stock was getting too expensive and the market wasn't going to be happy with anything was that the outlook for operating profitability of 46 to 47% for the second quarter was down from almost 49% last year. It means the supply shortages and everything that goes into data centers including in Orista's component suppliers is getting stretched and getting more expensive. That's lowering the profitability for everyone and investors used it as an excuse to take profits. Still though, Arista is a leader in that network and equipment that is also a very strong demand for the data center buildout and management affirmed its 28% sales growth for the quarter along with 20% earnings growth.

[00:12:29]Revenue is expected to keep up that 20% plus pace this year and next and it's going to help the stock rebound. Now, updating our stock market outlook, besides interest rates reaching that 5% trigger, earning season is coming to a close. While earnings have been surprisingly strong with the companies in the S&P 500 reporting profits up almost 28% from last year, investors have been unforgiving to any company not beating expectations. You see, generally companies beating forecast get about a 1% bump in their share price on that day. We've seen that play out with companies getting about an average 1.1% increase on earnings day so far this quarter. On the other hand, companies that miss expectations usually get sold off by 2.9% on the average in that disappointment. What we're seeing over the last few weeks though is stocks plunging by almost 5% in that disappointment and sometimes even selling off if results were good but not good enough. A nation that is a very strong signal of a market that just wants to take profits, take a breather, and is looking for any excuse to sell.

[00:13:28]Besides earning season coming to a close and a slowdown in that good news that comes from that 28% profit growth, investors have a busy week in economic data that could show inflation heating up and a weakening consumer. We're going to see both the consumer price index, the CPI, and the producer price index, the PPI, reports on inflation this week for April. The CPI is expected to show inflation has jumped 3.8% from over the last year from a 3.3% pace last month.

[00:13:55]That is a monster move higher and almost twice the target rate set by the Fed for rate cuts. On Thursday, we'll also see data on retail sales that is expected to show consumers slowing down their shopping. Now, again, I still like the long-term value on this market and want to be a buyer into the rest of the year, but that higher inflation is going to put interest rate fears front and center, and it's likely to send a 30-year Treasury back over 5% again. It could easily trigger one of those five or even 10% corrections we get so often.

[00:14:23]And you need to be ready with this for some protection before it happens. Get your $150 discount and see how to use options to leverage return, reduce risk, and create income with our ultimate options course. Get the strategy finder, the calculator, everything you need, all with a 14-day money back guarantee.

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