The S&P 500 trades just off its record highs. Nearly 60% of its stocks sit in bear market territory.
I see about 300 points of upside from here. I see about 800 points of downside.
That lopsided setup drove everything I covered in this weekend’s update.
I’ll start with the upside. I think the S&P 500 can reach 8,000 by the end of the year, and I’d even argue for 8,100.
The downside could turn into an abyss. A drop to the bottom of the volatility box takes the S&P 500 under 7,400.
A break of that box opens a straight shot below 7,000.
I’m watching the bond market as the trigger. Notes dropped hard about 45 minutes after Friday’s open, and the S&P 500 slid right along with them.
Apple recovered enough to steady the tape. That won’t hold forever. Nvidia isn’t bigger than rates, and nothing else is either.
Don’t wait for the VIX to warn you. It doesn’t react until you’re already hurt.
A handful of tech names hold this whole market together. Microsoft did most of the lifting with a side order of Apple.
Even with that help, the S&P 500 hasn’t gone anywhere since the start of August. Nvidia hit a record high Friday and barely moved the index.
If tech breaks, I expect money to rotate into utilities through XLU and staples through XLP. That rotation won’t save the S&P 500. Tech carries too much weight.
In this weekend’s video, I break down the numbers behind that risk and the trade I’d use for it:
- 75% of S&P 500 stocks ended September lower. The index itself did almost nothing during the month.
- About 59% of S&P 500 stocks sat 20% below their record highs as of September 21st. Walmart, Costco, Starbucks, McDonald’s, Caterpillar, and Nike are all taking heat.
- The S&P 500 now throws off the lowest dividend yield in its history. That’s happening at record highs in a rising rate environment.
- The SPY 750/740 put spread costs a $2 debit for $10 of width over 77 days. You buy roughly 15.6 volatility and sell roughly 16.6. Skew hands you a discount on the spread.
- Next week prices just a $97 expected move, down from $107 this week. The S&P 500 nearly covered that range from high to low on Friday alone. I’m taking the over.
I’m skipping the VIX entirely. I’d rather take the risk directly in the SPDRs with a defined cost.
That’s the kind of trade I want when the risk runs this lopsided.
