May 23rd 2023

Debt Ceiling Limbo: Market Stuck in Choppy Pattern as Traders Remain Complacent

With no new information coming about the debt ceiling, the market has been stuck in a slow, choppy pattern, with a bias to the upside.

Following two days of anticipation and certainty that the debt ceiling and budget had been resolved (as indicated in the blue box), the situation took a different turn when no agreement was reached. As a result, investors experienced two days of choppy trading, eagerly awaiting further updates (as indicated in the red box).

All eyes are glued to the debt ceiling talks, but there’s no published timeline for when that news might come through.

What’s interesting to me is the complacency of traders. The assumption is that the country will be saved, or more likely, the issue will be kicked down the road for a few months.

Now, I know the traditional VIX uses longer-term options in its calculation, but we have a relatively new product from the Chicago Board Options Exchange, called the VIX1D (or 1-day VIX). This is an attempt to adjust for the amount of near-dated options being traded.

As you can see below, even the 1-day VIX headed lower after yesterday’s trading activity. This means that investors are being lulled into a sense of security and don’t anticipate major volatility in the market, whether it’s using 1-day options or 30-day options.

The Nasdaq stocks are still in control, although many stocks are overbought at these levels.  The tech-heavy sectors continue to outperform.

Overbought doesn’t mean the trend is over as some of the bigger names refuse to pause.  

Microsoft (MSFT) isn’t looking to “fill the gap” it had at the end of April.  It keeps running higher on the AI hype train.

Ok, enough ranting. What does this all mean for the markets now?

The bullish stance is still in place. While there’s no catalyst pushing the market higher, which is concerning, there’s no catalyst to change the bullish momentum now that we’ve broken free from the previous areas of resistance.

Investors are still greedy (per the CNN greed index) and the VIX is showing that investors feel they are on an easy path higher for now.

Politicians are likely to strike up some type of deal that both sides can use to rally their respective bases, but real change is likely to be kicked down the road for another generation to deal with.

In the meantime, let’s see how our friends at the Fed can spook the markets later this week!

Today’s pick is on Spectrum Brands (SPB). It recently broke free from an area of resistance, and came down and touched that area again for it to become support. That’s around the $70 line.

If you’re into selling cash-secured puts, the 16 JUN $70 put is trading around $1.00. That’s $100 in potential premium on a $6900 investment or a 1.4% return in 24 days (20% annualized).

While you could convert it into a put credit spread, the 16-JUN 70 / 65 spread is only going for around 0.65. I want to see that be at least 1.00 for a 5-wide spread, but if SPB dips a little lower today or tomorrow, we could easily see 0.65 turn into more than 1.00.

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Jeff Wood

Editor, Filthy Rich Dirt Poor
Coach, Options Testing Lab

Any trade or trade idea discussed is for educational purposes only.  They will not be tracked as an official trade recommendation.