To correct or not to correct. That’s the question investors have on their minds regarding the market’s near-term trajectory. After a year of robust gains in the benchmark SPDR S&P 500 ETF Trust (NYSEARCA:SPY) – and an auspicious start in 2024 – it seems only reasonable that the stock market will take a breather.
Adding to the pressure is the release of the personal consumption expenditure (PCE) report, the Federal Reserve’s preferred gauge of inflation. According to economic indicators calendar, the PCE data should be released this morning at 8:30 am Eastern. Per Bloomberg, the report will likely highlight the bumpy path the Fed faces in achieving its 2% inflation target.
Essentially, the general consensus is that the PCE will validate recent commentary from policymakers that there’s little need to rush into rate cuts. If so, that could dampen investor sentiment, possibly facilitating a rotation to risk-off names.
Focusing on the Data
Nevertheless, two main factors suggest that investors – and particularly day traders – shouldn’t reverse their positions wholesale. First, the technical data doesn’t appear to warrant a 180-degree pivot.
Chart by Josh Enomoto, InvestorPlace.com
The SPY ETF has entered into a decisive uptrend since bouncing higher in late October last year. Until traders see clear evidence that the uptrend is about to be broken, staying the course seems prudent.
Also, a bearish signal in the SPY ETF was reversed on Nov. 14. Therefore, investors shouldn’t change their minds about the stock market without an unmistakable catalyst to do so.
Second, the numbers inherently favor a bullish approach. Over the trailing five years, whenever the SPY ETF opened at a price higher than the prior session’s close, 56.2% of the time, the current day’s trading ends in the positive. In other words, the underlying market features an upward bias, which we can attempt to exploit.
Trade(s) of the Day: Go Long the SPY ETF
Armed with the information above, the simplest approach to banking on the upside is to buy a 3X leveraged fund. For example, you may consider the Direxion Daily S&P 500 Bull 3X Shares (NYSEARCA:SPXL).
Keep in mind that as a leveraged fund, time decay can erode your position, irrespective of what’s going on in the market. The key here is to get in and out quickly, usually on an intraday basis.
For a more aggressive approach, you may consider the slightly out-of-money (OTM) 1 March 2024 $507 call for the SPY ETF. Per Barchart, this option closed Wednesday at $1.33. Using the investment platform’s options calculator, if the SPY ETF reached $507 – it closed at $506.26 – the contract theoretically could be worth $1.69.
Remember, this is a short-term trade so you must get out before the closing bell today.
On the date of publication, Josh Enomoto 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 InvestorPlace.com Publishing Guidelines.
