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The stock market is at such a critical juncture here, and following this morning’s hot CPI print, the reaction to this data will likely determine the market trend over the next three-to-five months. I continue to be bullish, but I am keenly aware of the macro, fundamental, and sentiment-driven risks facing this market that has moved into all-time highs. I’m going to outline our approach to handling a possible pullback from all-time highs following the CPI that calls the 2024 Fed rate cuts into question. I’m using the S & P 500, Nasdaq-100 and an option hedge I may implement personally, and for my research and wealth management clients. I can remember only a few other times in the past 20 years that I have been so laser-focused trying to nail down the next three-to-five months’ market direction. And after thoroughly examining every market data point and indicator we watch, I can tell you the next 10%-15% move is either higher or lower than from here. Let me explain. Following a horrible bear market from 2021-2022 we spent most of 2023 rallying and here we are at new all-time highs. The S & P 500 weekly chart shows a basic 5-wave Elliott trend that consists of 3 separate market advances labeled as 1,3, and 5. Between those market advances are two intervening market corrections labeled as 2 and 4. This is a textbook pattern that tells us to expect a correction recapturing between one-third to two-thirds of the prior advance, which foretells downside targets of 4,385-4,020. There are so many reasons, including persistently high inflation data, strong GDP and Q4 earnings, and a continued tight labor market that suggests the four, five Fed rate cuts so many are expecting this year may not come. How will the market handle this realization? I think that the realization process is happening now and the depths of this realization correction can’t yet be known. However, I think this is not the time to panic and take too many chips off the table after an incredible market recovery. I think it may be time to deploy an option hedge. Deploying a hedge Based on the chart above I’m pricing out a put debit spread in the July S & P 500 monthly options to protect against this ‘possible’ correction to the 5-wave advance. Specifically, I’m looking at buying the July 4,500 strike put and selling the July 4,200 strike put for a total cost of $21.00, or $2100 in premium. The spread is 300 points wide, but you’re paying 21 points so the total risk is $2100 to potentially make as much as $27,900 if the S & P is at 4200 on July 19th expiration. You can do the SPY as well that is one-tenth the size so you would pay $210 to possibly make $2,790. How many spreads should you do? Well, it depends on what you’re looking to protect. For simplicity, let’s say you want to hedge a $100,000 portfolio that is highly correlated to S & P. A move down to 4,200 is a 16% decline from here so you face a possible $16,000 drawdown. If you bought 6 SPY put spreads your premium cost is $210 x 6 = $1260 to potentially make $16,740. Am I saying the market is going to correct? Possibly, I have no idea. But what I can tell you is how surprised I am by the market’s incredible resilience as we move into a technological age so few of us really understand. We have to keep in mind the horrible market correction we just endured in 2021 and 2022, combined with the current accelerating exponential age of AI development and adoption, we may be just getting started. The Nasdaq 100 just broke out to new all-time highs immediately following the 2nd worst correction since in 2000. We may be on the cusp of a multi-year advance, which is why I would prefer to pay for a S & P 500’s put spread insurance policy and not abandon some of the key holdings we’ve discussed in prior articles such as Netflix, Spotify, Nvidia and Celsius. DISCLOSURES: (Gordon owns SPOT, NFLX, CELH, and NVDA) personally and in the wealth management business. Charts shown are Optuma) THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
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