Insights 
VT 
Asian markets have experienced a decline following recent highs in the Nikkei and KOSPI. Despite four consecutive sessions of selling, both indices still remain above their short-term trend filter, the 1D EMA-20 Bollinger Bands.
A noteworthy concern is the appearance of the Hindenburg Omen on the SPX, Nikkei, and KOSPI, suggesting weakening market momentum in the short term. The Hindenburg Omen indicates a divergence in market strength, with some stocks rising while others stagnate or decline.
Potential Volatility
This scenario does not guarantee a market crash but warns of potential volatility or corrections. Asian markets’ movements are crucial for assessing global risk appetite—further weakening might impact the SPX, whereas stabilisation could imply a brief reset.
Current indicators suggest a cooling phase rather than collapse. With breadth warnings and intact market structure, volatility might compress, possibly leading to a sideways or cooling period. Holding above short-term trend bands could lead to consolidation and potential growth. Traders should consider this phase as confirmation of future momentum.
The Hindenburg Omen is flashing on the SPX, Nikkei, and KOSPI, which tells us that market strength is becoming uneven. This is a significant warning, as we saw similar breadth divergences appear in 2021 before the major market correction in 2022. This suggests that while the trend is still up, the underlying foundation is cracking.
Managing Risk
This warning makes sense for the S&P 500, where a handful of mega-cap stocks now account for over 35% of the index’s total value, a concentration level not seen since the early 2000s. For traders, this means that long positions in broad market ETFs are more vulnerable than they appear. A downturn in just a few key names could easily pull the entire market lower.
Given this amber light, buying protective puts on indices like the SPX or QQQ is a prudent risk-management strategy for the coming weeks. This allows us to maintain our core long positions to capture further upside but insures the portfolio against a sharp pullback. It is a way to hedge our bets without turning fully bearish on the market.
The signal for volatility to compress also aligns with recent market data, as the VIX has been hovering in a low range near 14 for the last quarter. However, we know from past events, like the banking scare in 2023, that such periods of calm can end abruptly with a spike in volatility. This low cost of options makes purchasing protection even more attractive right now.
Therefore, traders might consider using debit put spreads instead of buying puts outright to position for a potential decline. By selling a further out-of-the-money put against a purchased put, we can reduce the overall cost of the hedge. This is an efficient way to get downside protection if the market is entering a cooling-off or consolidation phase rather than a full-blown collapse.
