We heard market moving news out of the Euro-zone this weekend. Stringent terms on a potential ECB-Cyprus bailout triggered talk of bank runs. In my opinion such an event is precisely the type of catalyst that could derail the bull market in equities. I’ve been anticipating a correction for some time now…this may be it.
The Cyprus buzz chopped a full 2% off the S&P 500 (from Friday’s highs to overnight lows). Equity bulls fought hard to grab control of the wheel once the regular session opened this morning, paring the loss to just 0.45%.
My suggestion: lighten up on your exposure to long stock positions, at a minimum.
The current market calls to mind a popular trading adage: “I would prefer to miss a profitable trade than be involved in a losing trade.” Equities could continue their grind higher, but the risk/reward of bullish trade is quickly turning against long positions.
And if you’re already leaning toward the bearish side, I have further recommendations below. Read on…
Since mid-November the S&P 500 has appreciated just better than 17% with very little in the way of profit taking. This move, at its current pace, is not sustainable. If last night’s selloff unfolds into a real correction, I see two likely downside targets. The first calls for a modest correction back to the 50-day MA (dark blue line), and just shy of the 38.2% Fibonacci level, around 1,500. A deeper correction would likely find support just under 1,450. This target is formed by a confluence of the 50% Fibonacci level and the 100-day MA.
Bearish exposure in the S&P 500 can be accomplished a number of ways:
- Buy bear put spreads (buy higher strike price puts; sell lower strike price puts).
- Sell short S&P 500 futures while selling out-of-the-money put options, 1:1.
- Sell out-of-the-money calls above the current market (perhaps the most aggressive play).
No matter which path you choose, make sure to implement some sort of risk management, being ready to cut losses if the market continues to grind higher. As a general rule of thumb, I try to avoid taking more than a 5% portfolio loss on any one position. Consider this, and your own risk tolerance, when constructing this trade.
As always, I’m here to discuss specifics and give guidance. Give me a call…
To discuss in more detail this chart or any other you can reach me at: mbradbard@rcmam.com or 954-929-9997
Risk Disclaimer: The opinions contained herein are for general information only and are not intended to provide specific investment advice or recommendations and are not tailored to any specific’s investor’s needs or investment goals. You should fully understand the risks associated with trading futures, options and retail off-exchange foreign currency transactions (“Forex”) before making any trades. Trading futures, options, and Forex involves substantial risk of loss and is not suitable for all investors. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources. You may lose all or more of your initial investment. Opinions, market data, and recommendations are subject to change without notice. Past performance is not necessarily indicative of future results.
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