What to Do Now?

Focus: OPTIONS

Kerry Given, PhD Image Kerry Given, PhD Founder and Managing Director, Parkwood Capital LLC

In sideways trending markets, Kerry Given, PhD suggests you choose stocks with a sideways price pattern and reasonably high levels of implied volatility to yield good premiums: BA, CELG, and ISRG.

What should investors do now? The Standard and Poor's Index (SPX) closed on Thursday (April 13) of this holiday-shortened week at $2329, down $16. This close remains above the low at $2322 SPX hit on March 27. There are two ways to analyze the S&P 500 price chart:

  • SPX remains in a sideways trading channel, but we may need to move our lower trend line down a bit, or
  • SPX has been trending lower since it hit its high on March 1, setting up an imminent correction.

chart 1
Standard and Poor's 500 Index (SPX)
Chart courtesy of StockCharts.com

I am inclined toward the former viewpoint of the broad markets remaining in a sideways trading range. Consider recent news events: the poison gas attack in Syria, and the US response, and North Korea's continued saber rattling rhetoric. And virtually every newscast is filled with stories designed to demoralize Americans, if not scare them about thermonuclear war.

How has the market reacted? The reaction has been minimal or nonexistent. Trading volumes on both the S&P 500 Index and the NASDAQ Composite have been consistently running below the 50-day moving average (DMA). The bulls remain in control and they haven't panicked-at least not yet.

chart 2
Russell 2000 Index (RUT)
Chart courtesy of StockCharts.com

The Russell 2000 Index (RUT) is composed of small to medium capitalization stocks and these stocks have historically led the market either up or down. But RUT has been trading sideways within a narrow range since early December. Thursday's (April 13) close at $1345 remains solidly within that trading range, albeit at the lower edge of the range.

In contrast to the Russell 2000 Index, the NASDAQ Composite has been the most bullish of the major market indices since the election last year.