Options Insights: Debt Ceiling, Market Rally, & NASDAQ Underperforms

The debt ceiling debacle finally ends, the market rally finally begins to broaden and NASDAQ underperforms for the first time in months: 

So now that the debt ceiling debacle has finally passed, with Congress approving the deal, the markets were able to celebrate with a broad sector-based rally for the first time in months. If this continues we will have a much healthier market as long as the NASDAQ does not have a massive pullback.

I don’t anticipate this to happen, but what I do anticipate is more of a “time” correction as opposed to a “price” correction (see examples below).  A time correction happens when time catches up with price and markets move sideways as opposed to a sell-off where prices actually correct.  

It’s very possible the NASDAQ can simply remain where it is and allow its moving averages to catch up with it. A slow summertime drift higher will allow it to underperform while the Dow Jones, S&P, and even the Russell 2000 play a much anticipated catch up game with its friend the NASDAQ.

As we enter the summer trading months, there is not much economic data to look forward to and many people see clear sailing ahead until we reach earning season.  Economists are currently pricing in a 30% probability of a rate hike in June, which gives this month little excuse to go lower.  

Could the fact that we have nothing to worry about be worrisome in itself?   With lighter volumes it will be easier for headline risk to cause markets to fluctuate, but what I always tell my options community is:  Trade what you see happening, not what you “think” or “hope” for. This advice has kept me out of a lot of trouble over the years.

The VIX or “fear gauge” remains very complacent and many see that as a warning sign. If we look at the past pre-pandemic period, however, you will notice that the VIX can stay complacent for a very long time (see long-term chart below).  Perhaps the VIX is just trying to “normalize” itself to pre-pandemic levels:

With certain sectors taking over the leadership position such as consumer cyclicals, it is important we just adjust our trading basket to reflect the broadening of the overall market.  I will be looking at my overall portfolio and adding names in real estate, consumer, and perhaps even Industrials. 

My sector analysis tells me that I still need to be bearish on energy, basic materials (see FCX below), and financials remain sideways or range bound . 

Here is where I’ll be looking to add sideways strategies to names like JP Morgan which I put on last week that is working out very well because it has gone absolutely nowhere (see below).  In the options market,  sideways is just as important as up or down!

In conclusion my opinion continues to be more bearish than what the market is showing me as a trader. I must force myself to be bullish sometimes when I don’t want to be. It is great when my opinion matches the market but unfortunately that is not always the case this week.  

We must follow our “process” and not our opinions.

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