Wednesday's Market Minute: Another Make-or-Break Moment for Stocks

Well, that was nuts. S&P 500 futures were up 3% this week before CPI hit exactly how bulls were hoping, sending stocks straight through that long-term resistance line around 4,100 that acted like a brick wall at the start of the month. Turns out, it’s still there. Tuesday’s brutal turnaround means the year-long downtrend line that defines the bear market held, but did sellers give it their all? We’ll find out tomorrow. If Powell can’t reignite the rally and plant stocks above that level, then in the words of Seinfeld: that’s a pretty big matzo ball hanging out there. 

With stakes this high and VIX this low, the best trade (once again) looks like betting on volatility. If bulls can pick up the pieces and meaningfully break that long-term downtrend in the S&P, it’s hard to ask for a more compelling technical event for anyone waiting to jump on board the rally. Long calls should pay. On the flipside, if we fail again at the exact same level and turn south, there’s not much else on the calendar for the year – bears should take back control and long puts would pay. Exposure on both sides of the aisle makes sense. 

Another key possible outcome is that VIX bounces no matter what. Even a big rally doesn’t necessarily mean a plunge in volatility – just take a look at Monday’s action. Stocks ramped, and VIX hit the highest in a month. That said, owning volatility is a bit riskier in case the move is to the upside. 

Danny Kirsch at Piper Sandler pointed out another approach that works particularly well for those needing to hedge their long equity positions. The volatility curve is skewed higher in the short-term, meaning you can own the same strike puts at the end of the month/year for a distinctly cheaper price compared to what you’d get for puts expiring on Friday.

The crucial point is that it’s going to be hard for stocks to quietly sit at this crucial juncture for long. I wrote something very similar two weeks ago going into Powell’s speech on the 30th, and it aged fairly well. Stocks rallied hard the day of, but immediately reversed. VIX put in the low of the month two days later. The lesson is probably that time is your friend, and Kirsch’s put spread out to year-end is about as good a chance to hedge, or speculate to the downside, as you’re going to get in 2022.

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