Market Recap: Another Rough Friday

Fridays have continued to be a struggle for the markets, a pattern observed since mid-January. This past Friday, the S&P 500 dropped 1.7%, following similar struggles in the NASDAQ. The primary reasons? Expiring options, shifts in market positioning, and weak macroeconomic data.

Recent S&P 500 Friday Performances.

• Zero-Day Expiry Options: Market conditions change dramatically as options expire, leading to volatility.
• Market Positioning: Expirations force new positioning, affecting the underlying market structure.
• Macroeconomic Data: Weak numbers continue to put pressure on stocks, reinforcing risk-off sentiment.

Year-to-Date Performance Snapshot

• Russell 2000: Down 1.6%
• S&P 500: Up only 2%
• NASDAQ: Underperforming significantly
• European Markets: Strong inflows into ETFs and mutual funds support positive performance
• Emerging Markets: Struggling, except for China, which has shown strength.

  

   

Key Market Drivers

Currency & Bond Market Shifts

• Dollar-Yen: Below 150, a key level to monitor, as major currency moves impact stock market trends.
• Japanese 10-Year Yield: Now at 1.4%, signaling a shift from previous years of ultra-low rates. One to watch for potential more sell-off due to the unwinding of the carry trade.

  

  Japan 10Y.

• U.S. 10-Year Yield: Decreasing from 4.6% to 4.4% as investors seek safety.
• Federal Reserve Expectations: Market pricing in two rate cuts, likely beginning in summer.

Sector Performance Trends

• Defensive Sectors Strong: Pharmaceuticals, consumer staples, utilities, and gold held up well.

  

   

• High-Beta Stocks Struggled: Online retail, cloud computing, and software stocks underperformed.
• Homebuilders: Weakness continues, despite prior market strength.
• Tech Stocks: Facing challenges, particularly in high-valuation names.
• Retail & Consumer Discretionary: Names like Walmart faced sharp declines amid high expectations.

Looking Ahead: Key Catalysts for the Week

1. German Elections – Political shifts could impact European markets.
2. Geopolitical Developments – European leaders visiting the U.S. for Ukraine discussions.
3. NVIDIA Earnings (Wednesday, Post-Close) – A major market driver, especially for AI and semiconductor sectors.

   

    

4. S&P 500 Seasonality – Historically, mid-February to mid-March sees a 2-3% decline, aligning with current trends.

   

    

5. PCE Inflation Data (Friday) – Key metric influencing Fed policy decisions.
6. Bond Market Dynamics – Shorter maturities could mean frequent refinancing risks ahead.
7. End-of-Month Positioning – Mutual fund rebalancing and rolling options positions may bring additional market moves.

   

    

Trading Strategy: Navigating Volatility

• Put Spread Positions: Currently holding May SPY put spreads (580/560) with a strong risk-reward ratio x7.7. Bought at $2.31 vs Last $3.13.
• Watching High-Beta Names: Stocks with extreme valuations are at risk, while defensive sectors provide stability.
• Monitoring Market Positioning: Post-options expiry, volatility could see a reset—be prepared for potential follow-through movements.

Final Thoughts

Market expectations for economic growth in the U.S. are cooling, leading to shifting sentiment. With inflation expectations rising and uncertainty in earnings ahead, traders should brace for potential volatility.

For those interested in refining their trading process, check out our 4×4 video series, mentoring sessions, and trading community on Discord.

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Email me at greg@duponttrading.com for inquiries.

Have a good Trading Week!

Greg