With last week’s climb, the S&P 500’s SPDR S&P 500 ETF Trust (NYSEARCA:SPY) brought its year-to-date move to north of 11%. The move also pushed the index toward $250 (2,500 on the S&P 500 cash index) and thus to the upper end of my near-term range.
At the same time, group rotation continues underneath the surface and few investors seem to be concerned about seasonal market volatility.
To best illustrate the current mood of the U.S. stock market I am once again bringing out my “hungry alligator” chart that has gotten so many people’s attention in the past. The SPY ETF in green continues its steady rise while the CBOE Volatility Index, or VIX, in red remains dead as a door knob and last week in fact closed back below the 11 mark.
The relationship between stocks and volatility over time is one of mean-reversion, as can clearly be seen on this chart. Note that we have not seen a mean-reversion move since late-October/early-November 2016 and if history is any guidance we should see one sooner rather than later.
Considering that through the lens of seasonal analysis the stock market tends to see at least one jump in volatility (and drop in price of stocks) during the September/October period, such a mean-reversion move is about as ripe as ever now and some partial and tactical portfolio protection makes sense in my book.
Whether this is done by raising portfolio cash levels or buying cheap protection via the options market in the end does not matter much.
Semiconductors In the Spotlight
Moving averages legend: red – 200-day, blue – 100-day, yellow – 50-day
Meanwhile, the sector and group rotation game that has worked all year thus far to some extent continued last week. Semiconductors stocks as represented by the VanEck Semiconductor ETF (NYSEARCA:SMH) gave traders a nice and well-defined breakout past their previous highs from June. On the single-stock level, names like Nvidia Corporation (NASDAQ:NVDA) also had textbook breakouts. Barring any immediate bearish reversals, these breakouts could see further upside momentum, with the SMH reaching up toward the mid $90s.
Breakouts such as those in NVDA stock from last week can be taken advantage of with a high-probability income-generating strategy using options. For those unfamiliar with this powerful income strategy I am holding a special webinar for InvestorPlace readers on Thursday, Sept. 21 at 7 p.m. Eastern, 4 p.m. Pacific. Click HERE to register.
The Bond Market
Lastly, on a macro level the bond market will be closely watched this week as the Federal Reserve embarks on its September FOMC meeting this Tuesday and Wednesday. An interest rate decision statement is expected on Wednesday at 2 p.m. eastern, followed by a press conference by chairwoman Janet Yellen at 2:30 p.m.
The outcome of this interest rate meeting could have profound consequences on rate-sensitive stocks. I will watch this closely for opportunities, but for the year-to-date, things have been very choppy in this area and it has been a great call to stay out of things like banking stocks, aside from tactical trading opportunities.
Check out Serge’s Daily Market Outlook for Sept. 18.
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