The Inform: Inventory market buyers “reside via three transitions” and short-term volatility can “get out of hand”.

This is a unique time for financial markets, marked not only by a wall of worry, but also by three turning points that could feed each other in the months ahead and are sure to cause turmoil for investors.

This is the summary of the outlook for Wall Street that BTIG researchers offered in a report with chief equity and derivatives strategist Julian Emanuel and equity strategy partner Michael Chu.

"We are experiencing three transitions that, in a time of heightened volatility, are a reminder that the long run is a series of short terms – often both down and up," wrote the BTIG strategists.

The researchers said the three transitions the market is facing are as follows:

Politically: Joe Biden is expected to be inaugurated on January 20, 2021.

Viral / Social: Coronavirus vaccine news gives the world hope that "normalcy" will return by the end of 2021.

Stylistic: Growth over value

In fact, they note that the transition to a new presidency under former Vice President Joe Biden, the market's reaction to news of advances in therapies and potential vaccines for COVID-19, and hoped rotations into shabby and unpopular stocks of technology-related names remain a hornet's nest of potential challenges that require skillful navigation.

Read: Trump isn't going quietly and fiscal stimulus won't come easily, but investors need to be more concerned

The Russell 2000 Index closed trading at an all-time high on Friday, marking its first such high since August 2018. The Russell 2000 Index
+ 2.08%
rose 6.1% for the week while the Dow Jones Industrial Average
+ 1.37%
rose 4.1%, the S&P 500 index rose 2.2%, while the Nasdaq Composite index
+ 1.02%
declined by 0.6% in the reporting period.

In addition, the popular Value Exchange Traded Fund is the iShares S&P 500 Value ETF
+ 1.94%,
outperformed its Growth ETF counterpart, the iShares S&P 500 Growth ETF
+ 1.07%,
by 5.86 percentage points, which according to Dow Jones Market Data represents the largest outperformance since March 2009 and the second largest weekly outperformance in its history.

So what's the best way to find a way forward?

Emanuel and Chu recommend hedging growth risk by opportunistically utilizing “pandemic lows” to buy puts for the Invesco QQQ Trust
+ 0.87%,
which tracks the Nasdaq-100 index
+ 0.93%
of large capitalization stocks. The couple also recommend selling calls and buying puts on the iShares Russell 2000 ETF
+ 1.46%,
for a collar and to look carefully for stocks that could benefit from further rotational shifts from technology-driven large-cap Nasdaq companies to value-driven small-caps.

Related Articles