Options Insights: Will the US Equities Pullback Persist?

Will the pullback in US equities continue because of Europe or will we prevail? 

As we drift out of June, into July and into the hot summer months, we can often lose sight of the big picture. Last week’s testimony by chairman Powell did not offer any new surprises, but did reinforce their continued aggressive stance on inflation, with 1-2 rate hikes predicted in the future. 

With inflation still a problem, it seems the markets for now remain satisfied that everything is under control. If you look to Europe, however, the economic news out of that region shows inflation is not under control and markets accelerated to the downside on Friday (see attached European chart).

Since European markets and US markets are closely correlated in the long term, the question is this: Will Europe drag down the US. or will the US push European equities higher? At some point, one of these things is likely to occur.  

With the S&P 500 down 1.42% last week as well as the NASDAQ 100 down 1.46%, the anticipated pullback is happening. Based on what I’m seeing, it remains to be seen if the pullback is over or if we will see continued selling pressure. 

For instance we had a “bullish engulfing” candle on Thursday, but no follow-through at all on Friday, mostly in part due to European weakness. This unfortunately leaves us with no confirmation and direction going into Monday (see attached)

So overall I remain a “wait and see” until I have confirmation to step on the “bullish” gas pedal. That, however, does not mean I will be sitting on my hands. There are areas of the market that have improved from last week, and there are areas of the market where I see bearish opportunities as well. 

What I love about options and what I have done well for the last 20 years is to be able to effectively execute both at the same time.

First I’ll start off with some Bulls. Last week I mentioned bearish credit spreads in the technology space as an alternative to counter-trend trading. Credit spreads on ORCL, AMAT, AMD, and CRM all worked out pretty nicely. 

It is time now if we get confirmation, to potentially go long in the same space.. One name I’ll be looking at is INTC, which sold off sharply, and confirmed on Friday that at least for now it has remained stable with an uptrend still intact. (see below).

On the bearish side, one area where I’m going to be spending a lot of time is the real estate sector. There was very bearish chatter in the news last week regarding the potential collapse of commercial real estate companies due to lack of demand and high vacancies.. 

This caused the whole space to sell off pretty sharply and was the worst performing sector of the week. BXP, which showed signs of breaking out from a long slump, is slumping once more (see attached).

I’ll be looking for bearish opportunities in this space as the negative headwinds and strong downtrends help me to maintain my consistent “edge”.  

Overall, this week should provide us with some clarity on continued upward direction, or further weakness could occur as the NASDAQ only saw its first down week in eight consecutive winners.  

As usual. My plan is to always play BOTH sides to the best of my ability and to show my traders all the valuable ways you can do that.

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