Trading The S&P 500 This Week
On 29 December 2015, the S&P 500 Index (SPY) hit a short-term high of 2,078.36. In the 10 days since then, the index has only shown brief bullishness when it rallied on 4 January to 2012.66, and 2,016.71 on 5 January. However, that has been the extent of the positive performance for the index which is now at a level of 1,922.03 for a loss of -1.08% on Friday, 8 January 2016. This particular index has a 52-week high of 2,134.72 and a 52-week low of 1,867.01. 2016 has started off in the worst possible fashion for the S&P 500 index, with a year-to-date return of -5.96%. Binary options traders who went short on the S&P 500 index will have been handsomely rewarded for their efforts.
Why is the S&P 500 index in the red?
As is so often the case in recent memory, China is front and center in many of the world’s problems. In fact, so dire is the state of the global economy that this is the worst possible start to a year for the S&P 500 index ever. There have been some positives in the mix, with the price of gold breaking through important psychological barriers, before retreating once again. The Japanese yen – another source of strength in Asia has also benefited from China weakness. However, ominous undertones remain as heavyweight investors like George Soros caution that another global catastrophe is being cooked up. To date we have seen some $2.5 trillion wiped out from global equities markets in just a few days.
The first 4 days of 2016 saw the S&P 500 Index plunge by 4.9%. The all-important DJIA also shed 900 points in 2016, and global shares ended a horrific 4-day run, down 5.2%. A big part of the problem is China. That the People’s Bank of China decided to weaken the CNY is evidence that there are deep cracks in the Chinese economy – deeper than most analysts, investors, traders and economists are aware of. China is attempting to make up for its plunging export figures by weakening the renminbi so that Chinese products are much cheaper on global markets. Along with weakness in China is weakness in the price of Brent crude oil and WTI crude oil. Even metals like copper are hitting multiyear lows under $2.
The fact that the Chinese authorities are intentionally weakening the currency does not bode well for international investors. It smacks of an economy in ruin. Massive capital flight, disinvestment and currency depreciation is now taking place in China. Since the Chinese growth engine is now substantially weaker, it makes sense to see vast selloffs of equities. The Chinese economic slowdown is adding additional pressures to commodities markets which have already been eviscerated by China. Since China is one of the largest consumers of commodities from emerging market countries, China weakness has a notable effect on the economies of South Africa, Nigeria, Venezuela and so forth.
It is quite possible that the price of Brent crude oil and WTI crude oil will continue plunging towards the $30 mark or less. Insolvency is a big concern for many investors, especially in the capital intensive mining and metals sectors. The price of WTI crude oil is $33.16 per barrel on the Nymex and the price of Brent crude oil on the ICE is $33.55 per barrel. Oil prices are so low, that gasoline at the pumps across the US is trading in the $1.90 to $1.95 range. Naturally, cheap oil benefits the everyday consumer, but it is destructive to families whose livelihoods depend on oil and natural gas companies for their employment and their survival.
That China decided to devalue its currency again (recall the 2% devaluation in 2015) was a major catalyst in the sharp selloffs that we have seen. Since 2016 is still brand-new, we don’t have enough information to evaluate the best and worst performing stocks quite yet. However in 2015 the best performing stocks in the S&P 500 index included the following:
The worst performing stocks were the energy companies, including the following:
The stocks with the lowest valuations in the S&P 500 index included the following:
Energy sector funds were 21% below par for the year, with the bulk of their poor performance coming in Q3 and Q4 2015. For this year, we can expect Adobe, Amazon and Netflix to be the large earners in terms of share growth.
The Takeaway: The S&P 500 index has star performers on board, but the energy and industrials are performing poorly. With IT stocks coming under pressure of late, it makes sense that the index is on its current downward trajectory. For the upcoming week, the smart money tells me to follow the trend and to place put options on the S&P 500 index. True we may see a slight rally if things pick up, but overall put options might be the way to go.
Disclosure: None.
Comments
No Thumbs up yet!
