With the stock market consolidating recent gains, headlines would have investors rethinking their investment decisions to start the new year. Worst week of the year! Stocks ridiculously overvalued!
Stock Market Consolidation
My favorite quote, regarding the stock market.
“This won’t be the worst week of the year, but it will certainly be a first.”
Yes, the stock market is pulling back, but that is normal after an 18% gain from the October 13 pivot lows. The gains for 2023 are roughly 11% (+/-).
Given this expected consolidation, we’re looking forward now to CPI and OPEX next week. We did start hedging with SPXU anticipating more weakness is possible into and after next weeks data.
Approximately 70% of SPX stocks are above the 50d and a similar amount above the 200d moving average. In addition, the 2023 gains have broken a downtrend that started in January 2022, “the Bear Market.” Given current conditions, we have a small hedge in SPXU.
We’re also looking for implied volatility (IV) to reverse versus realized volatility (RV). The current condition with IV and RV forecasted pullbacks in the past. The chart below from spotgamma.com shows this relationship in January, March, and August when extremes suggested the stock market was ready to pullback. The green line is SPX.