The market just keeps plugging higher. Is it wrong?
Every time we see a higher-than-expected inflation number, it seems that the market gets scared. Financial media starts discussing the possibility of fewer rate cuts, and slower potential growth as a result. And the market pulls back.
But the market gets bought back to highs shortly after. Is this the wrong answer from traders and investors?
Let’s first look at the broad market to see what’s happening, and I’ll do that via the ETF SPY:
It’s clear that everyone wants to buy, and as you can see on the charts, the buying happens right at the 20-Day Moving Average, then the market goes to a new high. So, the bull is in control, and it’s happening in many sectors. The key from here is to find the individual names that have potential for outlier returns during this market rally. And, of course, we need a signal that the broad market rally is coming close to an end.
To get a clearer answer on when the end might be coming, I like looking at bonds – after all, if interest rate expectations are changing for the long run and that’s what’s causing the market to pull back, then we should see it in government bond yields. For that, one of the easiest and most liquid ETFs to review is TLT:
As you can see, long-term interest rates expectations are stable despite the negative equity market commentary around FOMC expectations with rate cuts. This is a 20+ year bond ETF, so there’s certainly a large element of long-term interest rate expectations, but if interest rates over the long run are remaining stable, then these dips truly are a short-term event, and that’s what’s likely causing the market to firm on dips.
However, if TLT breaks below the 100-Day Moving Average and the recent lows, perhaps we can start to justify a bigger liquidation in the broad market, so when I look to buy the dip in the broad market, I’m certainly doing so both with defined risk and leverage, especially with the VIX this low. That means call options are the way to go for me, and if I structure the trade intelligently to define my risk and ensure that I have a high expected value to my trade, I can have long-term success from short-term market movements.
That’s the formula behind my outlier watch list – while many say you can’t time the market, if you have a system with defined risk, leverage, and timing on your side, I’d argue that you certainly can. So, take a look at the outlier watch list and you’ll see how timing and technical indicators can be used along with the leverage of options.
As always, please go to http://optionhotline.com to review how I traditionally apply technical signals, volatility analysis, and probability analysis to my options trades. And if you have any questions, never hesitate to reach out.
Keith Harwood
Keith@optionhotline.com
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