Options traders are on the same side as investors in the stock market as they hope for a break after an explosive 2022.
The slowdown in inflation growth has buttressed speculations that Fed Reserve will finally end its interest hike policies. The derivative traders are now hoping to get a break with volatility curves showing lower price swings at every point than what it was a year ago.
The past two weeks’ optimism is not at odds considering the other historical data. Since 1950, there have been only two consecutive years of stock market fall. One was during the early 1970s recession, and another was when the dot com bubble burst at the start of the century. Most Wall Strategists feel that nothing of the sort will happen in 2023.
Positive Outlook for 2023
Carson Group Chief Market Strategist Ryan Detrick feels the US can avoid recession this year which will be a significant catalyst for equity stocks. However, investors should not expect a smooth ride considering S&P Index had historically had a rough month in January after double-digit slumps.
Last week, S&P, however, rose 2.7% and is up by almost 4% this year. Last Thursday, the Labor Depart report of the Consumer Price Index showed a drop in December compared to the previous month, and it posted a minor hike since October 2021. This data will allow room for Fed officials to slow down the pace of rate increase in the February monetary policy meeting.
The news from the stock market is welcome for equity bulls. The S&P 500 Index posted a 19% decline in 2022, its worst performance since the 2008 global financial crisis. The down years had seen a rebound earlier, with the S&P index rallying 15% in the next year, according to data compiled by Carson. That is good news.
Barclays PLC’s strategist Emmanuel Cau said that the market dismissed the hawkish rhetoric of the Federal Reserve as they have valid reasons. Still, anxiety lingers among equity investors who had withdrawn $2.6 billion from US Equity funds from January 11.
The central bank may defy the expectations of the market. The Fed officials say traders are wrong to expect interest rate cuts this year. Also, corporate earnings will be released shortly, and they also carry risks for the market.
Mixed Track Record of the S&P 500 Index after Declines
January’s rally in the stock market may be short-lived as volatility remains on the horizon. But traders are not expecting huge shocks as of now. The two crucial economic reports of the US- the Consumer Price index and employment data- have been released. They show stable growth and an easing of inflation.
The project price swing indicator for S&P 500 – Cboe VIX Index closed at 18 last week, the lowest since last January. Institutional investors were seen covering their short positions in the past several weeks. This month, they increased the net long positions as per data by CFTC research analyst Ned Davis.
