Scoreboard
Last Thursday was a decent way to end a shortened and red week for the broader markets.However, markets have had two consecutive red weekly candles in a row. On the upside, the small caps bucked the trend and closed the week green. In fact, all week they had a bullish setup and led upwards. Alas for the bulls, the broader indices never joined the fight.
Look Back On Last Trading Day
Thursday, the small caps finally stepped back from the leadership role and closed slightly lower than the Dow and S&P. After reading the recap below, it will become clear that caution is warranted for bulls. Portfolios that are predominantly long need some balance or defensive plays.
Defense
This can be done via the VIX calls (VOLATILITY S&P 500 VIX), buying puts in indices or stocks or even with inverse ETFs that are leveraged. Defense money spent most often is "wasted" money, but that's precisely the point. As with insurance, policies are purchased in order to combat the unforeseeable. Simply because the likelihood of actually needing home insurance is minimal, foregoing a policy is daft. Insurance is in place to protect assets in case the unthinkable actually occurs.
Similarly, defensive financial moves are in place to protect financial assets. Just as insurance cannot be purchased following a disaster, defensive financial plays are put into action from the onset. While the premium costs may end up being "wasted," proceeding without protection will end up costing astronomically more.
Thu: DOW: +.37%, SPX: +.35%, NDX: +.11% , RUT (small caps): +.32%Week Opener
Recent rallies have mostly been relief pops based on the elimination of bad news; eventually, new bullish fundamentals will need to emerge on which to rally. Earnings season is here, but consensus is that the numbers won't be good enough to fuel a rally. Furthermore, companies are likely to be cautious in their forward guidance; thus, the proclivity to lean in favor of the bear trade. One such option would be to use credit spreads on particularly strong days that have no fundamental backing. There are exceptions to the rules, but during earnings season, it often proves beneficial to trade the indices.
The reason for today's run is attributed to bad economic news (bad NFP report) ultimately being good news for equity prices. There is a good chance that this is misplaced belief, as the Fed seems determined to raise rates in 2015 regardless of whether data suggests otherwise.
Weekly Trends
Tickers:
IYT iShares Dow Jones Transport. Avg. (ETF) IYT© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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