As the quarter draws to a close, the stock market seems to be losing some momentum, with speculations that investors are finally acknowledging the possibility of a delayed Fed rate hike in 2023. The S&P 500 and Nasdaq Composite have each recorded five losing sessions out of the last six.
Over the past three months, the S&P index made a significant move by breaking past the crucial resistance level of 4,200 in June. This event set the stage for a tug-of-war between bulls and bears, leading to uncertainty for investors, observed a team at Evercore ISI led by Julian Emanuel.
However, they encourage investors to “embrace the uncertainty” in our call of the day and provide insights on managing both sides of where stocks might head this summer.
Emanuel and his team noted that the breakout above 4,200 drove a surge of funds into stocks while also prompting massive covering of record S&P 500 short futures positions. “All these ‘new longs’ will be ‘underwater’ at 4,200,” they said, presenting the following chart:
On the flip side, the reversal at 4,450 underscores the frequent and volatile nature of momentum market pullbacks, as seen in 2021 and 1999. A return to 4,450 could revive the “chase” reminiscent of the 127% rise in the Nasdaq 100 following the 14.1% drop in 1999, according to the strategists.
In summary, the stock market may witness another showdown between bears and bulls this summer. For investors who prefer not to pick sides, Evercore recommends an options strategy known as the strangle. This strategy entails holding call and put options with varying strike prices but identical expiration dates and underlying assets.
To refresh your memory, calls are options contracts that grant the holder the right (not the obligation) to buy the underlying security at a specified price within a certain timeframe, while puts offer the right to sell. Emanuel and colleagues suggest that investors with a strong view could also place bets in one direction.
“With optionality remaining near its cheapest levels (VIX 14!) since the pandemic, we recommend buying the SPX Aug 4,450C/4,200P ‘strangle’ (Buy call and put; upside hedgers can buy the call alone; downside hedgers the put) to capitalize on the idea that uncertainty should be embraced this summer because anything can happen,” advises Emanuel and his team.
Be sure to review what Evercore recently mentioned about potential triggers for a selloff.
