Heading into the previous holiday week, the markets climbed higher, but this week it seems like the professional traders are still at home, stuffed from turkey dinners. But this period of low volatility may be short-lived. The question is where are we going from here?
First, let’s look at the inverted yield curve of the 10-2 treasury spread against the movement in the SPY this year. The yield curve is the top line graph and underneath is the SPY. The last time we had a divergence between the 10-2 and the SPY was from July to mid-August, and that led to six weeks of weakness in the market.
Here we are again with a divergence in the chart with the 10-2 heading lower to -0.77%, while the market climbs higher. Could this lead to another six weeks of weakness? Not if you are the stock pick of the day, but more on that later.
Now, let’s look at the volatility index, VIX. Since mid-October, the VIX has been heading lower. The VIX tends to move inversely with the S&P 500, so the markets could be poised for a pullback if the VIX breaks the recent downtrend.
The Russell 2000, as shown here using the IWM ticker, just bounced off its 20-period moving average. The Russell 2000 tends to be more speculative and can make its move before some of the other major indices. Since November, there have been three attempts to bring the index below the 20-day moving EMA. Should it break down this time, look out for signs of weakness in the broader markets.
We have a few more Fed speeches to get through today, including Jerome Powell at 1:30 pm EST. That may be the catalyst for the next move in either direction. If that doesn’t move the markets, look for the PCE number Thursday morning to provide some volatility.
Today’s trade idea is a seasonal bullish play on the ticker, CBRE. Looking over the next six-week period, the stock finished higher 83% of the time in the last 18 years with an average return of just over 6%.
Let’s go out and look at a few different options.
We’re going to assume the stock is headed to $81 (6% from current prices) by January 9th, so we’re going to look at the 20-JAN options.
The first choice is to buy an in-the-money call and pay $4.45 for the $75 call. The max estimated profit if the stock hits $81 by January 9th is $174.02. That would provide a decent return of 39.11%.
Option two is buying the cheaper, out-of-the-money $80 call, but you can see that while it only costs $205 per contract, the expected return falls down to 8.57%.
Option three is to trade the 75/85 call debit spread. That means buying the $75 call and selling the $85 call to help offset the cost of the purchased option. You can see this trade cuts the cost to $372, and has the potential to return over $200 should everything hit the targets. This trade offers the best return, but which one do you like best?
If you have any questions, comments, or anything we can help with, reach us at any time.
Email: [email protected]
Phone: (866) 257-3008
Editor, Filthy Rich Dirt Poor
Coach, Options Testing Lab
February 7th, 2023Is The Stock Market Cycle Pointing To A New Bull Market Already?Are we in another bear market rally or the start of something new? That’s what everyone wants to know, especially as we
February 6th, 2023Job Creation Shocks The MarketIf we’re heading into a recession, how were we met with better-than-expected job growth numbers last week? Unemployment dropped, despite the headlines of tech companies planning to lay off
February 3rd, 2023Job Cuts And Stock Buybacks Keys To Success In 2023 The thing I’ve learned from this earnings season is that a company can have consecutive quarterly drops in revenue and provide a lower
February 2nd, 2023Fed Raises Rates But Bulls Are Still In ControlOk, bulls. You win. I will start lifting my bearish stance on the market. Despite the final 10-minute market sell-off and a Dow that finished
February 1st, 2023What Past Fed Announcements Tell Us The Market Will Do TodayWatch out - this article is going to have some math.Here we are once again on Fed Announcement day. Most of the folks
January 31st, 2022The Hidden Profits Of 2023There is still one more trading day left in January, but if the adage “as the S&P 500 goes in January, so goes the year” holds true, the markets
January 30th, 2022 The Fed Goes Up Against Earnings This Week We are in peak earnings season with some heavy hitters like Pfizer (PFE), Snap (SNAP), Meta Platforms (META), Amazon (AMZN), Alphabet (GOOGL), and Apple
January 17th, 2022Smoother Sailing in 2023 Nothing has changed since the end of 2022, yet traders have already decided that this year won’t be as bad as the last. Bulls have been piling into stocks
January 12, 2023 The Rise Of Bing Over Google - That’s No Joke Before we talk about two tech giants getting ready to battle it out once again, let’s look at the overall market. The
January 9th, 2022 Why I Ignore Most Of The News It’s easy to get caught up in the financial headlines. I’ve certainly done it. Last week shows why I ignore most day-to-day stories. I know
267 Kentlands Blvd #225
Gaithersburg, MD 20878
P. (866) 257-3008
(Monday-Friday 9:00 AM-5:00 PM EST)
Publisher of actionable and proven strategies and tactics to help investors build wealth and reach seven-figure portfolios.
Get notified about new articles, special events, training, and much more
Leave your info below to get more options and trading ideas to your inbox
Yes, send me news to my inbox.