The SPY ETF Is an Even Stronger Buy Today, But Not Without Risks

  • SPDR S&P 500 ETF Trust (SPY) has rallied strongly, but odds also favor a continued bullish reaction.
  • Doubters and warnings off and on the S&P 500 price chart persist.
  • Investors should use a modified collar to manage downside exposure at no cost.
Man standing behind a Wall Street chart with S&P 500 on top of it. SPY stock.

Source: Funtap / Shutterstock

“March Madness” has continued an impressive comeback for bulls in the SPDR S&P 500 ETF Trust (NYSEARCA:SPY). This past week, the bellwether exchange traded fund added 1.84%. And with the clock ticking on the month, SPY stock is up 4%.

More positive, the S&P 500’s latest confirmation of a new bull market, came in the face of some challenging circumstances.

The rally shook off hawkish-sounding commentary from Federal Reserve Chief Jerome Powell. Early in the week, the top banker warned interest rates could be hiked more aggressively than the 25 basis point program laid out at the FOMC meeting.

SPY also managed to shake off higher oil prices on the week, as well as continued escalations across both ponds tied to Russia’s invasion of Ukraine and Covid-19 in China.

Of course, not everyone is on board with SPY stock’s new bull market. Let’s look at what else is agitating bears and driving today’s bulls, then offer a risk-adjusted determination aligned with those finding.

SPY SPDR S&P 500 ETF Trust $454.27

Bearish Ammo to Kill the SPY Stock Rally

Entering the week, a new phased Covid-19 lockdown in Shanghai is raising fresh concerns that global economic expansion is at risk. Despite SPY trading mostly flat in Monday’s session, bears will point to a plunge of more than 5% in crude oil as a harbinger of weakening demand and slower growth.

Monthly nonfarm payrolls are another threat to the S&P 500’s rally. The March data is set to be released Friday morning. Anything short of a Goldilocks employment situation could cause the Fed to make good on this past week’s interest rate warning at the expense of SPY.

Bears warning the SPY’s rally is a dead cat bounce within a market correction also have a 2/10-year treasury yield curve to assist their case.

The bond spread is close to inverting. If it follows through, it could weigh on the S&P 500, as every single recession since World War II has been preceded by this price irregularity.

The SPY stock chart has also signaled an ominous death cross pattern this month. On March 16, the 50-day simple moving average fell beneath the 200-day simple moving average for the first time in nearly two years.

Lastly, bears can warn the S&P 500 is expensive. Among those cautioning, BofA recently noted SPY is historically expensive on the majority of the 20 metrics it tracks by 40%.

What Matters to S&P 500 Bulls

Respectfully, the bears have their grievances. But it takes two to consummate a trade, and being too quick to discount the rebound over the past two weeks in SPY could be a mistake.

Buying the S&P 500 has proven a historically strong investment. And after a corrective cycle like this year’s, investors can pick up exposure to Apple (NASDAQ:AAPL), Nvidia (NASDAQ:NVDA), Costco (NASDAQ:COST) and other proven market heavyweights at a discount.

It’s true the SPY has rallied strongly off its low and could stand to consolidate its gains. However, with a technical-based follow-through day (FTD) in place — and critical to producing a bull market versus a dead cat bounce — bulls have sure evidence to be upbeat.

What about SPY stock’s death cross? The last one wrongly nailed the market’s historic Covid-19-induced bear market low. And it’s easy to see why.

Not only is the popular pattern a lagging indicator, but in over-the-top and historically fearful cycles like 2020’s and this year, it’s even more likely to be late to the party.

Buy SPY Stock Today with Less Risk

SPDR S&P 500 ETF Trust (SPY) monthly inside hammer forming
Source: Charts by TradingView

With less than a handful of trading sessions left in March, monthly SPY stock gains of 4% are visually hinting at continued upside.

A bullish inside hammer candlestick and stochastics just hitting oversold levels sets up a nice platform for moving further out of 2022’s market correction and extending the prior two years’ bullish Roaring ‘20s redux.

Are there risks? Absolutely. For one, not every follow-through day or good-looking bottom in SPY will be successful. In fact, we could be looking at a dead cat bounce.

Also, BofA’s warning on SPY’s more tenuous pricing mostly serves to confirm that bulls could be walking a tightrope with grave consequences.

If this month’s FTD fails, the S&P 500 ETF could slide as deep as $350 to $360 before finding more meaningful chart support. At the end of the day though, having exposure to SPY stock today makes more sense than not.

Given the pros and cons in SPY, buying a fully-hedged collar or modified variation on the stock are strategies to consider. One favored vehicle is buying shares with partial protection from a May $435/$400 put spread and financed by the short May $465 call for a small credit.

On the date of publication, Chris Tyler did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.

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