The Straddle Trade is Back

The Straddle Trade is Back

Stocks look painfully obviously poised for a pullback. Bring up a one-year chart of the S&P 500 Index or VIX and it’s pretty straightforward: the bear market’s trendline from previous highs intersects almost perfectly with the 4,000 level the index is trading at today, and the VIX just above 20 is smack-dab on the upward sloping trendline that marks the reliable quarterly surge in volatility that’s been the hallmark of this year-long bear market. The rudimentary, but most probable conclusion, is that the S&P will fall back into its downtrend and VIX will bounce into its uptrend.

That’s the base-level technical takeaway, and it fits with the logic of the underpinning thesis behind the market’s month-long bounce – that the Fed is going to soften its approach to fighting inflation. It seems reasonable that Powell will drop the next rate hike to 50bps from 75, but the trend of higher rates will most certainly stand, so it follows logically that the trend of the market should hold, too. 

Fundamentally, there’s also fresh reason for caution. Cloud stocks are reporting earnings, and they were arguably as big a catalyst for the bear market a year ago than anything from the Central Bank. Workday (WDAY) is doing alright so far, but Crowdstrike (CRWD) and NetApp (NTAP) are down double-digit percentages overnight.On the flipside, if the opposite happens, it would be a huge moment for bulls. Getting the VIX below 20 for the first time in a year would suggest we’re in the midst of something different than a bear market bounce. With bitcoin coiled up and the dollar stuck in a range, the potential for the next move to be a violent one, regardless of direction, looks high. This happens about once a quarter, and I think we’re in one of those moments again. Watch Jay Powell to get the ball rolling today. The likelihood the move is lower still looks more compelling in my mind, but the trade may just be to bet on a big move.

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Posted In: TD AmeritradeEmerging MarketsMarkets