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When I say the stock market loves 2800 I am only invoking the law of round numbers. That law states, loosely, that the stock market will get to the nearest round number most of the time. I did not invent that law but it sure works especially around the 2800 area. Today was not different as my colleague Mr. Mark Sebastian was thinking face ripping rally on Friday. It happened today.
Rallies on higher volatility can be problematic or not
The only problem with the rally is it happened very fast. We spent most of last week dropping from 2800 to the low 2700’s only to make it back in two short days. Stocks desperately want to rally but a rally on higher volatility does present some opportunities. VIX dropped to 14.33 and is now just .70 away from the lows last Monday. This is a good opportunity to get long SPX and buy VIX at the same time.
QE made face ripping rallies
Why do I say both? Normally stocks plod around and rally at lower volatility. The 2009-2018 period was infected with QE to varying degrees which created many volatile up days. Today feels like one of those days even with the less than enthusiastic response from stocks last week. This means the Trade War getting settled is a bigger deal than QE short term. Stocks only managed 2800 when deal looked promising.
Buying Options set up well
That does set up a certain kind of trade. With 2800 near, blowing past it is very difficult without the Trade War coming to a successful conclusion. Lackluster ECB news was enough to help the V IX to 17 last week. Option pricing right now would favor a cheap time spread in SPX to 2800 and VIX Mar call as a possible hedge. Why? Because they are both just over a dollar and VIX Mar expiration is next week. Mar ordinary liquidity is now a Mar Weekly and that only happens once a month.
Disclosure: VIX, SPX positions
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