Image: The S&P 500 (SPY) and corresponding 50-day (green), 100-day (purple), and 200-day moving averages (red). We expect the SPY may have to “correct” to the 200-day moving average, or about $412-$413 per share before it finds its footing. Self-inflicted wounds the past several weeks have altered the market’s sentiment for the worse, and we don’t think the selling is done yet.
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Hi everyone:
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Volatility has picked up, and options trading is all the rage.
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The markets are under pressure again this morning, and we’re not wasting any time to add put option “protection” to both the Best Ideas Newsletter portfolio and Dividend Growth Newsletter portfolio. The last time we added portfolio “protection” was near the COVID-19 crash. We’re not expecting a large market meltdown, but a key test of technical support on the S&P 500 is likely, given how aggressive the bull market has been.
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The bad news seems to have started with the botched pullout from the war in Afghanistan (where market observers began to question whether the Biden administration could effectively manage complex scenarios and handle adversity). This was followed up with the SEC’s aggressive stance toward cryptocurrency (which took the wind out of the sails of many speculators).
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Despite the pandemic, the Biden administration has not let up on proposing changed tax rates and policies either–policies that, if passed, could impact both high-earners and those holding ETFs. These events have been exacerbated by China’s ongoing crackdown across the board on privacy, anti-trust and regulatory issues, and the SEC’s warning that US-listed Chinese equities need to step up their accounting or risk being delisted by 2024.
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Of course, there was then the concerning trades by Fed Presidents Rosengren and Kaplan, and then Senator Elizabeth Warren called Fed Chair Jerome Powell a “dangerous man,” the combination of which only increased the possibility that Powell may not be re-nominated at a time when the market needs no such uncertainty, particularly as the global economy works to rid itself of the Delta variant.
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To make matters worse, some of the bellwethers in the market are again being attacked by what appears to be a re-run of the same types of adverse news flow that hit fever pitch in 2018, particularly as it relates to 10-rated Facebook (FB). The social media giant was hit by a 60 Minutes video over the weekend, and this followed a series of negative Wall Street Journal articles just a couple weeks ago. Read more about Facebook’s weakness >>
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From our perspective, it’s likely most of these events, though disconcerting, will prove immaterial in the long run. The War on Terror has not necessarily changed, cryptocurrency is here to stay with ETFs now holding the digital coins directly on the Toronto exchange, Biden’s tax proposals may only impact the market on the margin (if at all), China will always pose outsize risks for investors (which is nothing new), and Facebook is a net-cash-rich, free-cash-flow generating juggernaut.
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The more concerning dynamic, however, is whether we see a big shakeup at the Federal Reserve, now that public sentiment has shifted against the organization. We won’t know whether Powell will retain his Chair, until at or around the expiration of his existing four-year term February 5, 2022, but it’s definitely a risk the market doesn’t need to be staring down at the moment. We think the Fed has been a blessing for markets.
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We’re definitely not panicking by any stretch, but we think using the 3% cash “allocation” in both the Best Ideas Newsletter portfolio and Dividend Growth Newsletter portfolio to add some out-of-the-money long put options on the SPY makes a lot of sense. Long put options on the SPY with December 31, 2021 expiration and strike of $412 (near the 200-day moving average) are among the most liquid, and we think the small put-option “hedge” makes sense at this juncture.
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Remember — options contracts can expire worthless, and options trading is not for everyone. Be sure to contact your personal financial advisor if any options ideas may be right for you. For those interested in more options ideas, please consider subscribing to our additional options commentary here ($1,000/year). You’ll receive a confirmation email after registration and four new options ideas for consideration each month. Many members have loved this new addition to the service!
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We’ve also received a great many requests to talk more about financial statement analysis as well as the discounted cash flow model. Please be sure to book your talk with President Brian Nelson here. The discounted cash-flow model is more relevant than ever now that the markets are looking to pare back some of the froth. Be sure to learn the in’s and out’s of cash-based intrinsic value by registering to the webinar today.
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That’s it for now. We’re watching these volatile markets very closely, and you should, too.
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Kind regards,
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The Valuentum Team
valuentum.com/
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With options trading, investors can lose their entire premium. Don’t ever trade with money that you can’t afford to lose. Valuentum is an investment research publisher and accepts no liability for how readers may choose to utilize the content. By continuing with your additional options commentary membership, you accept our Terms and Conditions. If you do not agree with the Terms and Conditions, you must stop using this service and cancel your additional options commentary membership.
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Tickerized for FB, GOOG, GOOGL, AAPL, AMZN, SNAP, TWTR, SPY, DIA, QQQ, RSP
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Valuentum owns shares in the DIA, VOO, SCHG, SPY, and QQQ. Brian Nelson currently owns shares in SPY, SCHG, DIA, QQQ, VOT, and IWM.