Options Update: Is It Time To Sell The News?

AI drama leads Market higher, and debt-ceiling drama may be ending. Is it time to sell the news?

Markets were fueled this week by the new AI craze, mostly led by Nvidia, (see below) taking the NASDAQ up 3.53% this week. The other parts of the market, however, did not fare too well. The Dow Jones was actually down 1%, and the Russell 2000 and S&P 500 were basically flat on the week.

The overall breadth of the market remains lackluster, with only 40.60% of all names trading above their 50-day moving average.  The disparity among the indices continues to widen rather than consolidate, which is always a red flag for me.  

When more names are going down than up, but the market remains higher, that is not sustainable. Another thing to keep a close eye on is the VIX, which has recently consolidated and managed to put in a higher low (see below), which is another warning sign.

Most of all the recent gains in the markets can be attributed to the AI craze that has swept over investors and tech companies alike. Many readers can remember a similar time in the year 2000 when any name with a “.com” attached to the end of its name simply ran higher.  

That did not end well in March of 2000, and eventually it won’t either for the microcosm of AI names in NASDAQ today. Although I can not predict when corrective action will happen, what I can do is show you the warning signs.   

the NASDAQ put in a “blow off top” on Friday, which usually indicates potential exhaustion.   This doesn’t mean we can’t go higher from here, but it does mean we need to be cautious.  

Watching a stock or index trend up is much like watching a marathon. At the end of the race is when the last push always looks the most obvious near the finish line (see below).  This is when last minute buyers jump in that fear they are missing out, as well as short-sellers getting demolished and forced to cover their positions. 

After this occurs there are simply no more buyers left to support prices and we are left with corrective action.  

So here is my game plan for the week:  I’ll get some popcorn ready and perhaps scalp the Nasdaq on the way down if we see corrective action until it puts in a reasonable bull pullback.  I can easily do this with QQQ puts intraday and perhaps leave some overnight if a selloff looks persistent enough.  

This will also provide me with a good hedge against my long swing trades I currently hold and are vulnerable to corrective action.

Once the pullback ends and I see some confirmation, I plan on BUYING tech names as I am still overall bullish.   In the meantime, I am looking at sideways strategies in sideways sectors like financials and industrials to even out my “basket”.   

Butterflies trade still work pretty well, and I’ll be looking for names like JPM to move range bound as they have been. (see below). 

Bottom line is if you want to chase AI and the Nasdaq, you can, but things are beginning to deteriorate so be careful.  I’ll be looking at consumer names as an alternative on the long side, as that sector has shown decent relative strength.

I will express myself in the options market with caution, however utilizing mostly vertical spread strategies for now to allow me to sit through any upcoming volatility both AI and Washington look to provide this week.  

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