The year is young, but what seems most strange to the stock market rally that led to an increase of around 3% is that the utility sector as measured by the Select Sector SPDR Trust ETF (NYSE 🙂 has jumped quietly with more then 5.5%.
It joins the technology sector as measured by the Select Sector Technology ETF (NYSE :), which is approximately 6.8% higher than the top two performing sectors for the month. The recent increase in the utility sector may be a sign that investors are becoming more defensive
More worrying is the increasing number of call purchases for the option contracts that expire in mid-February. The bets suggest that some traders will see an increase in volatility in the coming weeks. It could be a strong indication that a relapse in the S&P 500 is fast approaching in the short term.
Technology select sector SPDR
Opposite Side of The Spectrum
It seems unusual for a sector such as utilities to grow alongside the technology sector. The two sectors literally appear to be literally on either side of the risk spectrum, with technology representing high beta, faster earnings growth, while utilities offer stability and slow growth. Even more impressive is that the XLU ETF has risen to its highest level ever.
Select Tool & # 39; s Sector SPDR
Rates fell at the longer end of the yield curve until early 2019, with the treasury yield falling by 20 basis points to 1.73% from 1.93% on 31 December. higher returns on parts of the stock market, with the utility sector as a port.
However, other high-yield sectors that are also defensive in nature, such as basic consumer goods and healthcare, have not seen the same type of outperformance, with the ETF of healthcare up to around 2.3% and the ETF of Staples with just 1, 7%, both performing worse than the S&P 500.
Increasing volatility?
It can also be a consequence of market sentiment that shifts from momentum, risk of sentiment to something more defensive. Recently, there are a number of bets in the VIX options for expiration date on February 21 at the strike price of $ 21 and $ 22. In addition, the open interest rates increased at the strike price of $ 24 and $ 25 for the same expiration date. That would require the VIX index to nearly double over the current levels of around 13.
The open interest in the $ 22 calls has increased over the last 2 weeks by around 265,000 contracts to around 305,000 open contracts. It is also no small bet, with the calls that trade for around $ 0.45 per contract, it gives the open calls a dollar value of around $ 13.7 million.
In addition, the $ 25 calls have seen their open interest rates rise by more than 110,000 contracts, to a total open position of around 160,000 contracts. These contracts are traded for around $ 0.30, with a dollar value of around $ 4.8 million.
Protection against a decline?
Some traders seem to be betting on a sudden peak in the VIX index and may hope to leave the contracts before the due date. Or they can buy these contracts as a form of protection when the S&P 500 and the stock market begin to fall.
With the S&P 500 almost 17% since the beginning of October, a small fall in the short term does not feel like a piece. Should a withdrawal occur, a huge S&P 500 support region would be between 3,200 and 3,250, a decrease from 2.5% to 4%. Indeed, no disaster through any imagination.
Although there is potential for short-term withdrawal in the markets, overall technical trends and the outlook for earnings growth should maintain the bullish momentum on the 2020 balance sheet.
