The S&P 500 experienced a drop shortly before the opening bell, with retail investors engaging actively with PCE and UoM data releases. Prices stabilized almost back to the levels seen before the dip. This week, the stock market displayed resilience, despite a selloff in BTC early on.
Crypto faced challenges on Friday, yet Nasdaq showed stronger performance. A discrepancy in performance among major stocks was evident, with NVDA and GOOGL noted as yearly winners. Questions remain about the market’s ability to sustain a Santa Claus rally, especially with potential hawkish moves from Powell. Anticipated earnings from companies like ORCL and AVGO also contribute to market dynamics.
Market Data Absorption
Friday presented poor data expectations, which were readily absorbed, with the data not significantly impacting the index. Retailers showed varied performances, and with better indicators for services than manufacturing, concerns over recession risk are highlighted. Rising Japanese yields could not impact the Nikkei or global stocks.
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The S&P 500 is showing remarkable resilience, establishing higher lows despite early week shakiness. Friday’s Core PCE inflation data, which came in at 2.8%, was better than the feared 3.0% print, fueling a buy-the-dip mentality. This pattern suggests a high tolerance for any news that isn’t outright disastrous, which is a bullish sentiment signal for now.
Federal Reserve Meeting And Market Sentiment
With the Federal Reserve meeting next week, we are looking at a widely expected 25-basis point rate cut, the first since the major hiking cycle of 2022-2023. Volatility, with the VIX index holding near a low of 14, makes buying call options on indices like the SPX and NDX an attractive way to position for a year-end rally. However, this low VIX also means any unexpectedly hawkish language from the Fed could cause a sharp spike, making protective puts a prudent hedge.
The Magnificent Seven stocks are no longer moving in unison, so we must be more selective with single-stock options plays. With only about 55% of S&P 500 companies trading above their 50-day moving average, the market’s advance is not broadly supported across all sectors. This suggests focusing derivatives strategies on momentum leaders like NVDA or key sectors like banking rather than playing broad market ETFs with equal confidence.
Looking ahead, the potential for a traditional Santa Claus rally is on every trader’s mind. Historically, this period is strong for stocks, with the S&P 500 rising about 77% of the time during the final week of December and the first two trading days of January. Given this seasonal tailwind, using short-dated weekly call options could be an effective way to capture a quick, sentiment-driven move higher.
