Earlier today there was a large trade in the SPY that caught my eye, where a buyer paid $2.
On May 16th we laid out the case for eventually taking a shot at the S&P500 on the short side (here), as the index’s “safe haven” status could be vulnerable if it had a failed breakout, but we cautioned that we saw no real reason to try to pick a top and preferred to wait for a failed breakout.
So are we there yet? The jury is still out. Lets take a look at the most recent breakout and new high in the S&P500 using the SPY. When we looked back on May 16th, traders and technicians alike were very focused on the relative weakness in the Russell 2000, down about 10% from the prior highs, and the fact that the SPY was sitting on an important technical support level, its 50 day moving average (purple below). Since then the SPY has rallied 2.5% to new highs, holding the uptrend and successfully bouncing off its 50 day:
Despite all of the top calling as a result of the relative weakness in high valuation tech/biotech and small cap stocks over the last few months, the SPY has been a stalwart, consolidating, and never getting close to testing the February lows. I can’t think of a single good reason to try to pick a top in the SPY unless you have a strong desire to be a contrarian for the sake of it.
As for that SPY put purchase today, I suspect the buyer was A. seeking protection for a portfolio of large cap stocks or related securities, and/or B. recognizes that implied vol in SPY options is not likely to get a whole heck of a lot cheaper:
The spot VIX is currently at the lowest levels it’s been in more than a year. Those with long exposure to the market can pick up some close to the money protection in the SPX and SPY for the cheapest levels in recent memory.