Where The S&P 500 And Bonds Go From Here?
The month of January just concluded and the final statistics for the market are not pretty. The S&P 500 closed down by over 3.5% while both the VIX and TLT closed up by more than 9%. What I conclude from this is that people are selling stocks to buy bonds and are seeking protection and a much quicker pace. There are two very good reasons as to why this is happening.
The first main reason is the very weak earnings season we had. The tech sector without AAPL had 0% earnings growth year/year. In addition to that, financials and energy reported underwhelming results. Financials have been the biggest underperformer on the year, with names like BAC, JPM, and GS all down 10-20% from their recent highs. Everybody has known hat the market needs a correction in order to go higher. We need new money to come into the market. That has been very clear the last few weeks, as every rally has been unsustainable (as there are more sellers than buyers). Mostly impart to the “sell-the-rip” phenomenon in place in the market. With the S&P 500 sitting right on crucial support, I suspect that we are going to break the key 1990 level over the next few days, and possibly test 1960 (the 200DMA). The 1960 level on the S&P 500 is a must hold. If we do not hold that level I suspect that we are heading down to 1800-1820 (the October low), at which I would become very bullish. I expect TLT to continue to rally, as people will continue to move their money out of stocks and into bonds.
The second fundamental reason for a market pullback is the deflationary atmosphere that we are currently in. The Euro Zone just reported 0.6% deflation last month. I think it is important to be cautious for the foreseeable future. I would change my market stance from being bearish to bullish if the market is able to hold the 1990-2000 level.
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Trades to Consider:
SPY February 195/200 Put Spread for $1.65
TLT February 137/140 Call Spread for $1.45
Buy VXX/UVXY stock. Put a stop at a 10% loss. With the market breaking down, the VXX can start to gain significant momentum
Both of these trades play for continued weakness in the broader markets over the coming weeks.
You can follow all of my trades by following me on Twitter: @maxganik
Disclaimer: Always contact your financial advisor before making any financial decisions. ...
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For volatility allergic investors (I know you're out there somewhere) maybe consider an ETF like PowerShares S&P 500 Low Volatility (SPLV). Its up over 20% in the past year and is probably a good long term bet if seas turn choppy ahead. Top holdings include Walmart, Stericycle, and Proctor & Gamble.