S&P 500 Near 5,000, Now What?

If ever the saying that the market can go remain irrational longer than you can remain solvent applied, now would be that time, especially for the bears.

With the S&P 500 within touching distance of 4,900 by the close of last week, it’s now within spitting distance of 5,000, a figure that seemed so far out of reach just a year or so ago when it was close to 3,500, few could imagine how far it’s come.

Bears attempting to short each rally have been met with ever higher prices, margin calls, and portfolio losses. As they are forced to cover their positions, buying pressure continues and the march higher appears to be unstoppable. It’s at that point where bears essentially throw up their hands in defeat that usually marks the top, but it’s not clear we are there just yet.

Key Points

• The technical view of the market now paints a bullish picture with a breakout on the weekly chart above a key threshold level.
• The S&P 500 has risen in 12 of the past 13 weeks, suggesting the rally is likely nearer its end than its beginning.
• To manage the bullish technical breakout against the long uptrend with less favorable reward to risk ratio, a covered call strategy offers good hedging potential.

In fact, a technical analysis of the S&P 500 using a weekly time frame now would suggest that a meaningful resistance level has been breached and the market is “open sky” territory.

Some have speculated that the market is in the midst of a blowoff top and is going to go parabolic before it finally corrects. Certainly, the trend from November 2023 through January 2024 shows evidence of that, with the S&P 500 rising higher over 12 of the past 13 weeks.

One analyst, Cem Karsan, identified windows of potential weakness in the market from January 17 through to the end of month and again from Valentine’s Day into March options expiration. So far, the market has bucked the bearish traders off and marched resiliently higher during the first window so, with it narrowing, the next opportunity to short appears to sit about 3 weeks away.

How To Play The Market Now

As the rally gets long in the tooth, it becomes increasingly difficult to balance reward and risk. On the one hand, staying invested makes sense but chasing with new dollars seems like a risky bet as the downside potential grows. On the other hand, timing the downtrend is challenging given the sustained march higher even through these windows of weakness.

To hedge against a possible downturn while staying invested, one possible avenue is to sell call options on stocks already owned. If the markets fall then the call options expire worthless and provide some cushion against the blow. Yet if prices rise further and the options are assigned the maximum return will be made in the covered call strategy.

It’s a nice hybrid strategy when compared to say buying put options that require an out-of-pocket expense because cost basis is lowered (versus increased with puts) when applied.

At the very least at this time, it’s smart to look in the rearview mirror and keep an eye on just how far the market has come and recognize that the upside is starting to look a whole lot slimmer versus the downside.