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Traders Opting for Safe Havens and Cheap Insurance

A better safe than sorry attitude has resulted in a flight to bonds and defensive sectors, higher option premiums


Welcome back to the frisky fray. I hope everyone is well rested for a new week that hopefully will see more interesting trading action than we had last week.

Friday qualified as an uneventful day in the equity markets by most definitions as the major U.S. indices traded fairly flat. In Europe, however, we saw a little more volatility.

Most U.S. indices closed at the lows of the day, but the Russell 2000 small-cap index once again outperformed the mid- and large-cap stocks, like it did on Thursday, rallying 0.4%. As I discussed on Friday, it is difficult to call for a cyclical bull market top when small caps are not showing relative weakness.

Traders were focused on the progress, or lack thereof, in negotiations surrounding the Russia/Ukraine crisis. At a press conference on Friday, Secretary of State John Kerry said that his meetings with Russian Foreign Minister Sergey Lavrov hadn’t led to a favorable solution, and that leaves the door wide open for a binary outcome from Sunday’s Crimea referendum. Binary risk for traders isn’t the kind of thing that screams good risk/reward, but rather something that usually leads to risk aversion and a flight to bonds and defensive sectors.

For my part, I consider cash to be a valid asset class, particularly at crossroads like present. As a result, and in full disclosure (because that’s how I roll), I headed into the weekend with a 71% cash position, two longs and two short positions. This should help protect my 7.5% year-to-date gains regardless of the referendum outcome.

In the latter part of last week, we once again saw traders bid options premiums higher, i.e., increased implied volatility, and this is clearly reflected in the chart of the CBOE Volatility Index (VIX). In other words, traders with a “better safe than sorry” attitude were looking for fairly cheap ways of protecting their portfolios.

Historically, the VIX still stands at very low readings, and only a meaningful move above the 20 mark would be taken as a more panic-driven move.

VIX Chart
Click to Enlarge

Respecting that the last week or so was about investors taking a step back in order to let this latest geopolitical story play itself out, I continue to focus on what’s working on the long side, which at present, is admittedly little. Gold, gold miners and a good amount of utility stocks stand out among the otherwise sea of red we saw throughout last week.

The Utilities Select Sector SPDR (XLU) is itching to break to fresh multi-year highs, all the while holding its longer-term uptrend.

XLU Chart
Click to Enlarge

Within the sector, I am seeing some wonderful charts with technically tight patterns. One such stock that looks particularly interesting on the long side is Exelon Corporation (EXC), a utility services holding company engaged in the energy generation business. After overcoming its 200-day moving average (red line) in February, it is now trying to overcome multi-month resistance in the $31 area. 

EXC Chart
Click to Enlarge

In terms of the S&P 500, traders will largely be focused on geopolitical news related to Ukraine and Russia, which will likely determine whether we see a near-term trend change in U.S. markets. Very simply, a positive outcome could result in a resumed uptrend, while a worsening of the situation could lead to further weakness.

Next support on the index is around the 50-day moving average (yellow line) near 1,840, followed by the 1,800 mark. On the upside, I still have my multi-month target area between 1,920 and 1,970, which I think may end up being the topping levels of the current cyclical bull market in U.S. equities.

SPX Chart
Click to Enlarge

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

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Download Serge’s trading plan in the Essence of Swing Trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities.

For a list of this week’s economic reports due out, click here.

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