S&P 500 Offers Trade Potential In Volatility
In this article:
- Traders “go to” S&P 500 in volatility
- Apple, GDP hold clues to market health
- Internal signals reveal market nervousness
Traders’ expectations moved a bit more bullish last week after the overall stock market pushed against major negative news in interest rates and gross domestic product (GDP).
While last week was positive, traders should not too quickly forget that this is a bear market with any rally propped up on a structure as frail as popsicle sticks.
That brittle structure was exposed this week as August added its second down session across the board in as many days.
S&P 500 (SPX) offers trade potential
This market has not held to the sound structure of a well-defined trend – up or down – so Simpler’s traders always have a “go-to” view of what is happening.
They turn to potential plays in the S&P 500 (SPX) when earnings reports are all over the place and outside influences such as historic inflation and rising interest rates draw out negative market reactions.
The SPX can provide a safety valve amidst a volatile market.
The SPX is a favorite for searching out potential options trades because the SPX “cash closes” at the end of the day – no share assignments and no overnight contracts. This limits capital risk to only the amount paid for the options contract.
In a see-saw market environment, traders can consider setups that close out risk at the end of each day.
A risk-avoidance play might include unbalanced butterfly setups that target specialized options plays. Zero Days To Expiration (ODTE) options plays are taken on the last day of expiration of an options contract. These setups can limit risk because the contract is closed at the end of the day (the SPX settles in cash) with no overnight exposure and no worry about having shares added to the trading account.
Traders can determine an options setup by midday and allow the contract with rapidly decaying premium to continue to close. This is a calculated risk vs. reward setup that takes advantage of the specialized aspects of this options contract.
This is a unique way to participate in this market with an added tool in the trading toolbox.
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Look at broader stock market view
With the market in a sideways push leaning more bearish, here is a recap of what traders are watching in relation to the S&P 500:
- $SKEW.X (Cboe Global Markets SKEW index) – This technical tool tracks volatility skew in options. Skew calculates volatility differences between in-the-money options, at-the-money options, and out-of-the money options. This has proven to be an indicator of whether fund managers prefer to write call options or not. The index operates on a scale from 100 to 150 with the higher number showing that fund managers are more nervous about a two-standard of deviation correction. The $SKEW was at 121.78 on Tuesday and ranged as high as 170 in April.
- VIX (Chicago Board Of Exchange (CBOE) Volatility Index) – This index anticipates market volatility over the next 30 days. The VIX is considered the “fear” index and has been trending lower over the last five sessions, ending just below 24 today (up 4.77%). A level above 20 is considered high volatility – more fear in the market. Simpler’s traders have estimated the VIX could be on a trajectory to spike much higher heading into the fall.
- DXY (U.S. Dollar) – Markets tend to trade lower if the dollar trades higher. The DXY closed up .84% at $106.34 on Tuesday. Markets are expected to grind lower if the dollar trades higher. For the stock market to have a solid chance of a rally, watch for DXY under $104.
The S&P 500 fell for the second day in a row after moving higher last week. Internal signals remain in negative territory with the downtrend for the index still a concern.
Technology stocks within the S&P 500 have been hit by high inflation. The recent Consumer Price Index (CPI) report showed inflation climbing to 9.1% year-over-year. This also affected the technology-laden Nasdaq and the Dow (which holds key technology stocks) the same as the S&P 500 so far this month.
Keep in mind that the Nasdaq is still down almost 21% for the year, and this includes key sectors in computer software and semiconductors.
Learn about trading from a professional
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Simpler Trading put together an online community like never before – a free trading room. This online training chatroom is designed to allow traders to experience the insight from a professional trader during live market hours.
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Keep your eye on Apple, GDP
Simpler Insights has been watching technology stock Apple, Inc. (AAPL).
The mega-cap company spiked higher last week after a strong earnings report beating revenue and profit expectations. This in the face of analyst downgrades and a softer market for its high-end products.
Simpler’s traders have held that if Apple falls the market could be headed for trouble. Here’s action in Apple which closed today at: $160.01 (down .93%). Apple grew from a pandemic low of $57.21 in March 2020, but is down from $182.01 since Jan. 1. Apple is a high-value stock within the Dow, Nasdaq, and S&P 500.
Apple and other technology stocks face high inflation holding at a 40-year high. This has pushed American consumers to guard their wallets more than expected.
The plight of Apple and consumer sentiment is underscored by the latest official U.S. GDP figures showing a drop of .9% for the second quarter. Combine this result with the 1.6% GDP decline in the first quarter, and the back-to-back negative GDP numbers have sparked a widespread debate about whether the U.S. economy is in a recession or not.
Ongoing projections of economic growth can be tracked at GDPNow, a forecasting model from the Federal Reserve Bank of Atlanta.
Have patience in volatile market
For traders feeling the pain of leaning too strongly on popsicle stick rallies, the market is always moving and “resetting” with potential trades in the mix.
Simpler’s traders understand that this volatile market environment requires added patience as the recent run higher has stalled. Even if the popsicle sticks fall, there will be trades at hand.
The key is having patience to grab well-defined trades even as the market shifts quickly.