The S&P 500 Bull Market Is Back! Double Your Dough With SPY

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Profits reigned on Wall Street following the Federal Reserve’s decision to raise the fed funds rate a quarter point yesterday. By day’s end the S&P 500 and its accompanying ETF, the SPDR S&P 500 ETF Trust (NYSEARCA:SPY), had climbed 0.84%.

But not all sectors joined in the buying binge. Banks — which had previously been leading the market — lagged substantially. Perhaps tactical traders used the rate hike as an opportunity to sell the news. Meanwhile, beaten-down metals and commodity stocks stole the show through much of the afternoon.

With the uptrend reasserted and buyers back in control, the time for new bullish SPY trades is now.

From a price perspective, Wednesday’s surge couldn’t have come at a better time. The S&P 500 ETF was in pullback mode over the past two weeks, retreating toward its rising 20-day moving average.

SPDR S&P 500 ETF Trust (NYSEARCA:SPY) chart
Click to Enlarge
Source: OptionsAnalytix

Not that we saw any significant selling, mind you. The volume accompanying the retracement was benign. We’re talking the type of participation seen during garden-variety pauses, rather than trend-killing distribution. In the end, the testing of the 20-day moving average provided an ideal opportunity for dip buyers to sally forth before any minor support levels gave way.

And sally forth they did.

 

Skeptics could argue the strength of the SPY is masking some of the deterioration beneath the surface. The argument does have merit. The damage dealt in commodities and energy did take the small-cap-laden Russell 2000 Index down a couple of notches. But if Wednesday’s rotation was any indication, it appears those areas are back in vogue. Metal and energy stocks of all stripes were screaming higher all day. With weak sectors now strong it’s tough to bet against the S&P 500 here.

Get Long SPY With Call Spreads

Wednesday’s reminder that the Federal Reserve remains a friend of the bulls is likely to perpetuate the low-volatility fog that has settled over the Street. Since option premiums remain subdued, you can initiate long option plays for minimal capital.

To capitalize on further upside out of the S&P 500, consider buying the May $239/$244 call spread for $2.29. The position consists of buying to open the May $239 call while selling to open the May $244 call. The max risk is limited to the initial $2.29, while the max reward is limited to the spread width minus the net debit, or $2.71.

By risking $2.29 to capture $2.71, the trade allows the potential to more than double your money if SPY can rise above $244 by May expiration.

As of this writing, Tyler Craig owned neutral options positions on SPY.

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Article printed from InvestorPlace Media, https://investorplace.com/2017/03/sp-500-etf-spy-federal-reserve-trade/.

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