<p><img src="https://static4.businessinsider.com/image/5f351f51e89ebf001f0443c2-532-399/2020-03-05t214613z_1849997888_rc2xdf96p30y_rtrmadp_3_usa-stocks.jpg" border="0" alt="Trader NYSE" width="532" height="399" data-mce-source="Andrew Kelly/Reuters" data-mce-caption="A trader works on the floor at the New York Stock Exchange (NYSE) in New York City, U.S., March 5, 2020."></p><p></p><bi-shortcode id="summary-shortcode" data-type="summary-shortcode" class="mceNonEditable" contenteditable="false">Summary List Placement</bi-shortcode><p>It was a sort of hands in the air kind of moment, said Peter Cecchini, a 20-year market veteran, who started adopting a strategy of being "tactically bullish" in the markets around Thanksgiving of last year.</p><p>"There are times when you're playing chess and everyone else is playing checkers and you're actually the fool," said Cecchini on <a href="https://www.bloomberg.com/podcasts/what_goes_up">Bloomberg's What Goes Up podcast</a> released on January 1. "You have to recognize when an obsession about things like earnings, growth, when that is just less important than the narratives that are driving the markets. And for me I didn't feel like there was anything to derail the narratives, that the vaccines were here, that growth was going to pick back up, which it has."</p><p>On the podcast hosted by Sarah Ponczek and Mike Regan, Cecchini, who spent nearly 10 years as chief global market strategist and head of equity derivatives at Cantor Fitzgerald, discussed the current state of the markets and his outlook for 2021.</p><p>Now, Cecchini runs his own research and consultancy firm, AlphaOmega Advisors. Based on his years of experience, he is saying the current conditions remind him of the dot-com boom, a time when many new investors were entering the marketing and trading stocks on their computers through e-trading accounts.</p><p>"This one feels a lot like 1999. I remember asking myself how companies that had almost no earnings, negative cash flow, almost no revenues could be worth hundreds of millions of dollars," Cecchini said. "And ok, it's not a perfect analogy but from a sentiment standpoint it does feel quite the same."</p><h2>Market strategy</h2><p>But for investors currently in the market, how do they position themselves for a wave that keeps going up but that at some point will inevitably correct'</p><p>On the podcast, Cecchini says investors will need to start looking at more sophisticated investing strategies, as it has become very difficult to buy put options, Cecchini said.</p><p>Put options give their holder the right, but not the obligation, to sell a stock at a specific price within a specific time period. Investors often use put options as a form of investment insurance to ensure losses do not exceed a certain amount.</p><p>Right now, most of the strategies available to investors involve making a directional bet, Cecchini said.</p><p><em><strong>Read more: </strong><a href="https://www.businessinsider.com/stock-market-bubbles-burst-investing-predictions-tips-2021-roaring-20s-2020-12">'It could be a Roaring 20s that will end badly': An equities chief who oversees over $7 billion shares his investing playbook and major predictions for 2021 and beyond</a></em></p><p>"And what I mean by that is the only way to really fund a Russell  strategy is to sell a call, to buy a put, or a put spread, so that you are selling a little bit of volatility to fund your downside protection," Cecchini said. "And you're making a directional bet, that is a lot more directional than if your buying a Russell  put for example. The same is true for the S&P ."</p><p>For investors who are long, he recommends selling calls to overwrite your portfolio. Calls give the buyer the right, but not the obligation, to buy a stock at a specific price within a specific time period. </p><p>Selling a call involves owning the stock while at the same time giving someone else the right to buy your stock. The investor collects the premium and hopes the option expires, this provides the investor with income. But this also limits profit potential because if the stock rises then the buyer will act on the strike price.</p><p><em><strong>Read more: </strong><a href="https://www.businessinsider.com/investing-advice-wisdom-success-tips-terry-smith-fund-warren-buffett-2020-12">Investing legend Terry Smith's $30 billion equity fund returned 449% to investors over a decadeHere's his 4-part strategy for success and 10 pieces of investing wisdom to take into 2021</a></em></p><p>For investors who are currently underinvested, it makes sense to be a little heavier in cash, Cecchini said, because the premium burn from buying expensive put options is probably just too much to tolerate.</p><p>He also recommends gold and investment grade credit, which he is currently positioned in. Investment grade credit is attractive, because it offers support from the Treasury and the Federal Reserve, he added.</p><h2>High yield risks</h2><p>But Cecchini warns investors about high-yield credit. </p><p>"I wouldn't be dipping my toe into high yield, I think that's a chase that is going to end poorly," Cecchini said.</p><p>S&P Global Ratings are <a href="https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/s-p-global-ratings-projects-9-speculative-grade-default-rate-by-september-2021-61425400#:~:text=23%20Nov%2C%202020-,S%26P%20Global%20Ratings%20projects%209%25%20speculative%2Dgrade,default%20rate%20by%20September%202021&text=S%26P%20Global%20Ratings%20Research%20projects,according%20to%20a%20new%20report.">predicting a 9% default </a>rate for speculative-grade credit in 2021. He thinks this is concerning considering the US has some of the lowest absolute yields in the junk bond market that he has ever seen. On the podcast, the host highlights Cecchini's personal estimate for defaults is even higher than S&P, around the 12% mark.</p><p>A default cycle could catalyze a second slowdown, because earnings will fail to grow, Cecchini said. The question is whether the Federal Reserve and the Treasury will agree to fund a special purpose vehicle, which in turn will extend these loans to primary and secondary lending facilities, and if they do, will these programs become more permanent'</p><p>"Whether or not the investing public becomes confident that there will be a permanent backstop in the credit market, in the corporate credit market will clearly weigh on how risk plays and whether or not that default cycle is dead forever or not," Cecchini said. "If it is dead forever, then I think we unfortunately have a situation where our system of capitalism is dead because I think without some level of default or recession then that price discovery method just doesn't work anymore."</p><p><em><strong>Read more:</strong> <a href="https://www.businessinsider.com/investing-strategy-stock-market-barry-norris-tips-rolls-royce-argonaut-2020-12">Investing veteran Barry Norris is beating 95% of his peers by betting against the market's riskiest companies. He warns investors against the 'siren call' to own value stocksand explains why he's now bearish on Rolls-Royce</a></em></p><p>The Fed's economic goals is to maximize employment. So when price discovery doesn't work, that creates challenges because firms struggle to get price. And when firm's can't get price then profitability suffers, which has a knock on effect in raising workers wages, Cecchini said.</p><p>Cecchini thinks that 2019 and early 2020 demonstrated the Fed's inability to stimulate inflation, highlighting that rates were already low and that activity was starting to slow before the pandemic.</p><h2>Bubble territory</h2><p>Equities now look rich considering rates are still so low. And this in turn means bubbles are starting to form in areas of the market, Cecchini said.</p><p>He points toward small-cap stocks and the technology sector.</p><p>Small-cap stocks concern Cecchini because he doesn't see how cyclical earnings will come back and despite this, those stocks are being 'wildly overbought'. While on the technology side, he says, he has been watching a basket of 10 technology stocks and believes they are now in bubble territory.</p><p><em><strong>Read More: </strong></em><em><a href="https://www.businessinsider.com/stock-market-crash-indicators-2021-bubble-bursting-jeremy-grantham-spacs-2021-1">Jeremy Grantham predicted the past 2 financial meltdowns. Now he says these 3 signals are foreshadowing a crash in another bubble being created by stocks and SPACs.</a></em></p><p>Cecchini thinks investors are losing sight of the financial position of companies coming into 2020. Earnings will not go to the moon, he said. Investors will just be back to a situation where cash flows were being challenged and debt levels have exploded, citing the <a href="https://www.bloomberg.com/news/articles/2020-11-17/america-s-zombie-companies-have-racked-up-1-4-trillion-of-debt">$2 trillion of "zombie companies"</a> where cash flows don't cover interest.</p><p>The immediate response to zombie companies is that earnings will get better. But Cecchini says don't count on that.</p><p>"My view was 2020 was going to be a rocky year to begin with," said Cecchini, looking back over the year. "I think one of the most surprising things of this year was the fact that in some ways the pandemic actually forestalled I think a number of defaults that would have happened in its absence because of the ferocity of the policy response on both the monetary policy side and especially on the fiscal policy side."</p><p>Ultimately Cecchini advises investors to be tactically bullish in a market that is being driven by narratives. But cautions investors recognize they are not out of the woods simply because there will be a recovery and to look back to 2019 and early 2020 to understand the outlook going forward.</p><p><em><strong>Read more: <a href="https://www.businessinsider.com/sanford-deland-keith-ashworth-lord-investing-strategy-warren-buffett-strategy-2020-11">'</a></strong><a href="https://www.businessinsider.com/sanford-deland-keith-ashworth-lord-investing-strategy-warren-buffett-strategy-2020-11">Be</a><a href="https://www.businessinsider.com/sanford-deland-keith-ashworth-lord-investing-strategy-warren-buffett-strategy-2020-11"> greedy when others are fearful': Here's how a top UK portfolio managerwho returned 238% to investors in 9 yearsleverages Warren Buffett's advice</a></em></p><p><a href="https://www.businessinsider.com/stock-market-crash-3-pieces-investing-advice-stock-market-bubble-2021-1#comments">Join the conversation about this story »</a></p> <p>NOW WATCH: <a href="https://www.businessinsider.com/worlds-most-expensive-liquid-thoroughbred-horse-semen-2020-3">Why thoroughbred horse semen is the world's most expensive liquid</a></p> Click here to read full news..