Market Analysis: S&P 500 Rebounds, Technical Levels, and Seasonal Trades
The S&P 500 Index experienced a sharp correction at the beginning of the year but has rebounded, nearing all-time highs. This market analysis delves into the technical levels of the S&P 500, various indicators, and explores a seasonal trade strategy known as the ‘January Defect.’
Technical Levels of S&P 500:
- The S&P 500 has recovered from the initial correction and is close to all-time highs. A new 52-week intraday high was recently registered. The key level to watch is 4,800, and a clear breakout above this level would favor the bulls. Support exists around 4,700 and 4,600, with a critical threshold at 4,550 (December lows). Falling below this level could signal a bearish trend.
Indicators:
- McMillan Volatility Band (MVB): A sell signal is in effect with a target at the lower -4σ “modified Bollinger Band.” The sell signal would be invalidated if the S&P 500 closes above its +4σ Band.
- Put-Call Ratios: Equity-only put-call ratios are on sell signals, indicating a bearish sentiment. These signals align with computer analysis programs despite recent fluctuations.
- Market Breadth: Internal indicators, particularly market breadth, have not kept pace with the strength of the S&P 500. Both breadth oscillators are on sell signals, presenting a negative outlook.
- NYSE New Highs vs. New Lows: New Highs continue to outnumber New Lows on a daily basis, providing a positive indicator. A shift would occur if New Lows exceed New Highs for two consecutive days.
Implied Volatility:
- Implied volatility, as measured by the VIX, remains low even during market corrections. A VIX buy signal is intact unless it closes above its 200-day moving average (currently at 15.60).
- The construct of volatility derivatives continues to display a bullish attitude toward stocks, maintaining a positive trend.
Realized Volatility:
- Realized volatility, measured by the 20-day historical volatility of the S&P 500 (HV20), rose above 10%, triggering a sell signal. The sell signal would be invalidated if HV20 falls back and closes below 9%.
Seasonal Trade – ‘January Defect’:
- The ‘January Defect’ is a seasonal trade strategy based on historical market correction patterns in mid-January, particularly affecting tech stocks. The system involves shorting the Nasdaq-100 Index at the close of the eighth trading day of January and covering the short at the close of the 18th trading day. The trade is executed using QQQ puts, with potential entry points on the 8th, 10th, or 12th trading days.
Trade Strategy:
- Entry: Buy 1 QQQ Feb (2nd) at-the-money put at the close of the 8th and 12th trading days of January.
- Exit: Sell the first put that becomes 20 points in-the-money, and roll the other down when and if it becomes 20 points in-the-money. Sell all remaining puts at the close of the 18th trading day of January (Jan. 26).
The market analysis emphasizes a mixed outlook, with positive signals from the S&P 500 chart and the volatility complex but negative indicators from put-call ratios and market breadth. The ‘January Defect’ seasonal trade strategy introduces a tactical approach to navigate potential corrections. Traders are advised to monitor technical levels and indicators for potential shifts in market sentimen
