The stock market has recently faced some headwinds, as the hopes for Fed rate cuts in 2023 fade and investors start to feel the consequences. Both the S&P 500 and Nasdaq Composite have lost ground, with five losing sessions out of the last six.
One significant event during the last quarter was the S&P finally breaking past the resistance level of 4,200 in June. According to a team at Evercore ISI led by Julian Emanuel, this created some uncertainty for investors, marking a “pressure point” for bulls and bears alike.
Despite this uncertainty, Emanuel and his team are urging investors to embrace it, explaining how to manage both sides of the stock market throughout the summer. The team notes that “the breakout above 4,200 caused a flood of funds to move into stocks…all these ‘new longs’ will be ‘underwater’ at 4,200.” They offer up a chart to illustrate their point.
However, they also point out that market pullbacks such as those seen in 2021 and 1999 are common and volatile. A move back up to 4,450 will likely reignite enthusiasm for stock market investment. The strategists suggest that a similar pattern occurred in 1999, when a 14.1% fall was followed by a 127% rise in NDX (the Nasdaq 100), indicative of a “chase”.
Overall, Emanuel and his team believe that uncertainty is an inevitable part of the stock market’s ups and downs. They urge investors to be flexible in their approach in both bullish and bearish markets.
Bears vs. Bulls: A Summer Showdown
As the battle between the bears and the bulls continues to unfold this summer, investors are faced with a difficult decision. Fortunately, Evercore has a strategy that can help, known as the strangle.
The strangle involves holding both call and put options with different strike prices but the same expiration date and underlying asset. This gives investors the ability to profit from both bullish and bearish market movements (you can learn more about strangles [here](insert link)).
To clarify, calls are options contracts that give the holder the right to buy the underlying security at a set price by a certain time. They are commonly used for bullish bets. Puts work the opposite way, giving the holder the option to sell at a set price. Emanuel and his team believe that investors who have a strong market view can place bets accordingly.
“With optionality remaining near its cheapest levels (VIX 14! VIX, -0.21% ) since the pandemic, we recommend buying the SPX Aug 4,450C/4,200P “strangle” (Buy call and put; upside hedgers can buy the call alone; downside hedgers the put) to capitalize on the idea that uncertainty should be embraced this summer, because anything can happen,” said Emanuel and his team.
For more insights, check out Evercore’s recent analysis of potential triggers for a selloff.
Read: What does a big first-half gain mean for the rest of 2023? Find out [here](insert link).
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