February was another great month for U.S. stocks, with each of the three major indexes setting record highs, and two of the three indexes hitting their highest February in nearly a decade. But March Madness is here, and the market is having a somewhat mixed start to the month. This potential profit-taking contrasts with the positive reaction to this week’s inflation data, which showed a continued cooling trajectory. I remain optimistic for the market in the 2024 election year, but here I have a short-term view of taking profits if volatility returns and profit-taking becomes a theme in the last month of Q1. Indicates a trading strategy. The S&P 500 and the tech-heavy Nasdaq each posted their best February returns since 2015, while the Dow Jones Industrial Average posted its best February return since 2021. This is notable because historically there has been a “seasonal” weakness in February returns due to portfolios. Disappointment during redeployment and earnings season. However, the fourth quarter earnings season did not disappoint. According to FactSet, 97% of S&P 500 companies report actual operating results, investors can expect 73% of these companies to beat EPS expectations, and S&P 500 companies report growth of 4.0%. I’m watching it. This marks his second consecutive quarter of year-over-year increases in the benchmark index. If 4.2% ends up being the actual earnings growth rate for the quarter, it would be the index’s 13th consecutive quarter of earnings growth, according to FactSet. Time to Hedge So why am I worried about a slight pullback now? With the SPDR S&P 500 ETF (SPY) trading at an RSI level of 76, there are opportunities at these overbought levels. I see that there is. Markets rarely move in a straight line, and the recent rally since November has been incredible. I would like to sell SPY’s “Risk Reversal” and use part of the option premium collected to raise funds and reduce the cost of purchasing downside puts. Trade Sell SPY Risk Reversal: March quarter (Thursday) Sell (collect) a March $525 SPY call expiring for $1.05 March 28 Quarter (Thursday) Buy $490 of SPY expiring for $1.45 Purchasing a 3% out-of-the-money $525 call (since SPY was trading at $509 at the time of this trade) and a $490 put on the downside would cost the debit spread $0.40, or $400 per lot. As markets continue to rise and record amounts of cash ($6 trillion) gather on the sidelines, it’s important to remember that sentiment can change quickly, even at a CBOE Volatility Index of 13. I think so. .VIX 1Y Mountain CBOE Volatility Index, 1 Year March Madness is approaching, so be agile. Disclosure: (Kilberg owns Risk Reversal and Spy) The above is subject to our Terms of Use and Privacy Policy. This content is provided for informational purposes only and does not constitute financial, investment, tax, or legal advice or a recommendation to purchase any securities or other financial assets. The content is general in nature and does not reflect your unique personal circumstances. The above may not be appropriate for your particular situation. Before making any financial decisions, you should strongly consider seeking the advice of your own financial or investment advisor. Click here for full disclaimer.
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