To The Moon

Powell Warns of Overvalued Stocks: Crash Coming or Year-End Rally Ahead? 📉📈

When Federal Reserve Chairman Jerome Powell remarked that “by many measures, U.S. stock valuations are quite high,” the reaction was immediate. U.S. equity markets slipped, with the three major indexes turning lower and extending losses. For investors who have been riding this bull market, Powell’s words were more than just an observation — they were a direct challenge to the foundation of market sentiment.

We know the U.S. stock market has rallied hard in recent years, fueled by optimism over artificial intelligence, strong earnings in megacaps, and expectations that the Fed will eventually cut rates. But as valuations climb, the risks increase. The S&P 500 now trades at multiples well above historical averages, sparking fears that even a modest shift in growth outlook or interest rate policy could trigger a correction.

Yet history shows another side to the story. Despite valuation concerns, markets often climb into year-end as funds rebalance, retail investors chase performance, and optimism over the next year builds. So where does that leave me as an investor?

I don’t want to abandon stocks entirely, but neither do I want to ignore Powell’s warning. That’s where hedging comes in — and I rely on a mix of strategies to balance risk while staying invested. Here’s how I’m approaching this market.

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Why Powell’s Warning Matters ⚠️

Powell’s comment may sound like a passing remark, but Fed chairs rarely speak casually. By highlighting “quite high” valuations, he essentially cautioned investors that risk appetite may be running ahead of fundamentals. This matters because:

• Valuations vs. Earnings: If earnings growth slows, high valuations can’t be justified.

• Fed Policy Uncertainty: Even with rate cuts expected in 2025, inflation risks remain, meaning liquidity won’t be as free-flowing as before.

• Investor Sentiment: Warnings from the Fed often shake confidence and trigger short-term volatility.

This doesn’t automatically mean a crash is imminent. It simply means I need to prepare for the possibility that the next 5–10% market move could be downward, not upward.

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Historical Year-End Patterns 🎄📊

Interestingly, markets have a tendency to rise into year-end — the so-called “Santa Claus rally.” Over the past two decades, the S&P 500 has posted gains in Q4 about 70% of the time. Portfolio managers often put cash to work, companies issue buybacks, and investors grow optimistic about the new year.

So I face a paradox: Powell’s valuation warning signals caution, but historical seasonality suggests optimism. To resolve this, I don’t go all-in on either scenario. Instead, I balance my positions with hedges that allow me to participate in upside while being protected on the downside.

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Hedge #1: Using SQQQ as Downside Insurance 📊🛡️

The first tool in my playbook is SQQQ (ProShares UltraPro Short QQQ), a leveraged inverse ETF designed to rise when the Nasdaq 100 falls. With tech stocks making up the bulk of recent gains, they are also the most vulnerable if valuations deflate.

I don’t allocate a large percentage here — leveraged ETFs are volatile and can decay over time. Instead, I treat it like an insurance policy. A small position in SQQQ can offset larger losses in my long tech holdings if the market drops.

For example, a 5% hedge in SQQQ could cover a 15% drawdown in my Nasdaq-heavy portfolio. If the market doesn’t fall, the cost is simply the small drag on returns — just like paying for insurance.

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Hedge #2: Selling Puts 20% Below Market – Income with Discipline 💵✍️

Another hedge I use is selling put options on stocks or ETFs I want to own long-term. The key is to sell them at strike prices 20% below current market levels.

Here’s why this works:

• If the market drops sharply, I may be assigned shares, but at a price that’s already significantly discounted.

• If the market stays flat or rises, the puts expire worthless and I keep the premium as profit.

• I’m paid upfront to take on the obligation, which softens portfolio volatility.

This is a defensive income strategy. Instead of panicking during sell-offs, I use the pullback as an opportunity to buy quality assets cheaper. Powell’s comments increase the chance of volatility, which pushes up option premiums — making this strategy even more attractive right now.

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Hedge #3: Buying IAU – Gold as a Timeless Safe Haven 🪙✨

Gold has always been a hedge against uncertainty, and I gain exposure through IAU (iShares Gold Trust ETF). Gold often moves in the opposite direction of stocks, especially when fear spikes or the dollar weakens.

With interest rates trending lower, the opportunity cost of holding gold diminishes. If Powell’s caution translates into a market correction, gold could shine as investors seek safety. Even a small allocation acts as a stabilizer.

Historically, gold doesn’t always surge during equity drawdowns, but it reliably diversifies risk. In my portfolio, IAU balances the heavy equity weighting and adds peace of mind.

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Hedge #4: QYLD – Turning Volatility into Monthly Income 📈💸

Finally, I use QYLD (Global X Nasdaq 100 Covered Call ETF). This ETF buys the Nasdaq 100 but systematically sells covered calls against it. The result is steady monthly income from option premiums, regardless of market direction.

In volatile periods — exactly like now, with Powell’s comments stirring fear — option premiums rise, which boosts QYLD’s distributions.

Of course, there’s a trade-off: if the Nasdaq rallies strongly, upside is capped because of the calls sold. But I’m comfortable with that. QYLD isn’t about chasing maximum gains; it’s about building consistent cash flow that cushions downside risk.

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Putting It All Together 🔑

So how do these hedges work in combination?

1. SQQQ protects me if tech-heavy indexes crash suddenly.

2. Selling puts generates income and ensures I only buy quality stocks at discounted levels.

3. IAU diversifies into gold, which historically holds value during uncertainty.

4. QYLD provides a reliable income stream from volatility.

Together, these create a layered defense. I don’t abandon equities, but I reduce the pain of corrections and keep cash flow alive. It’s about balance — participating in rallies while being resilient in downturns.

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Scenarios I’m Watching 🔮

• If Powell remains hawkish: More valuation warnings or slower rate cuts could weigh on stocks. My SQQQ and IAU hedges should benefit, while put-selling income offsets losses.

• If the Fed pivots dovish: Lower rates would support equities into year-end. QYLD income continues, and my hedges act as minimal insurance cost.

• If volatility spikes: Options premiums rise, making both put-selling and QYLD more profitable.

Either way, I’m positioned to weather storms without giving up on long-term equity growth.

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$QYLD 20251121 16.0 PUT$ 

Final Thoughts 🌟

Powell’s statement that U.S. stocks are “quite high” in valuation isn’t noise — it’s a reminder. As an investor, I can’t control the market, but I can control my risk. By layering hedges — SQQQ, discounted put selling, IAU gold, and QYLD covered calls — I keep myself flexible, protected, and disciplined.$QYLD 20251017 17.0 CALL$ 

So whether we see a year-end crash or another Santa Claus rally, I’m prepared. For me, hedging isn’t about predicting the future — it’s about thriving in whatever future comes@Daily_Discussion @TigerClub @Wrtd @TigerStars @MillionaireTiger