Amid signs of fatigue in the ongoing market surge, it has become imperative to protect investors’ financial interests, especially for those heavily invested in long equities. Recent increased market volatility stresses the urgent need for strategies such as portfolio diversification, hedging, and stop-loss orders.
An uptick in market activity in recent months has led many investors to lessen their short positions while maintaining a sizable net long position. This leaves numerous portfolios vulnerable to possible market downturns and underlines the need for protective measures.
Technical analysis reveals unsettling trends, such as the SPDR S&P 500 Trust (SPY) and Invesco QQQ Trust (QQQ) showing a rise in price peaks but a decline in momentum and advance-decline line peaks. The decrease in the percentage of stocks crossing their moving averages, despite equities setting record highs, suggests a narrowing market participation – an ominous sign for continued market strength.
The Nasdaq Composite reveals signs of divergence. Despite achieving record highs, fewer component stocks are hitting new 52-week highs. This is mirrored in the decrease of Nasdaq Composite members trading above their 50-day moving averages, indicating weaker breadth. These divergences could be forewarning of a potential threat to the bullish trend and suggest the equity market may be unstable.
Alerts are appearing across multiple sectors, particularly with stocks like Nvidia that significantly fueled this rally. These signals hint at potential exhaustion and increase the likelihood of a setback. The upcoming release of inflation statistics also creates a risk.
A glance at the CBOE Volatility Index (VIX) suggests that buying downside protection for portfolios via SPY options is currently affordable. Given the potential influencers that might significantly affect the market, a put option on the SPY could be a wise investment. Regular monitoring of market indicators, such as the VIX, can aid in making well-informed investment decisions.
