European markets and US futures are trading lower due to the lack of any significant easing signs from China. The fact is that if the economic data and corporate earnings continue to improve, there is no need for such a measure. In fact, it is the strong U.S. corporate earnings that drove the S&P500 and Nasdaq toward their record high yesterday. The S&P 500 index closed at 2933 while the Nasdaq Composite Index closed at 8120.
It wasn’t long ago when we saw the S&P500 index plunge all way to 2351 back in December. At the time, the consensus was that there isn’t any strong catalyst that can drive the markets back towards their record high. However, speculators were wrong. The Fed changed its stance towards their monetary policy, the Muller report was less damaging than anticipated, the Brexit tragedy is still somewhat contained, the trade war has almost cooled off and concerns over growth and corporate earnings were overly exaggerated.
The S&P 500 index is up 17% year-to-date (YTD) while the Nasdaq and Dow Jones indices have scored gains of 22% and 14% YTD respectively. Looking at these numbers one can clearly see why investors may suffer from FOMO, or fear of missing out. Nonetheless, markets have fully recovered from the brutal sell-off that started towards the tail end of last year.
The question that stands in front of us now is how far can this go and what could the next catalyst for such a rally be?
The answer is pretty simple; corporate earnings need to stay robust. So far, the reporting season shows that nearly 79% of companies have beaten their profit estimates. Having said this, we have not seen massive participation from hedge funds or so-called institutional money . The recent CFTC data shows that the bullish sentiment for the S&P index decreased by 36%, meaning we have more short positions in the market. This shows that smart money is ready to bank big, if the market falls again. Moreover, one thing is for certain when it comes to smart money; it does not like to play the catch-up game.
Thus, the safest bet is to have insurance in your portfolio. The VIX volatility index is incredibly cheap, it is down 51% YTD. Given the record highs in the market, it makes absolute sense to buy volatility at its record low levels. I am not saying that the major benchmarks have run out of steam. It is highly likely that the S&P 500 index may continue its move to towards the 3,001 level. This is the next major resistance. It would be a smart idea to have some insurance while one maintains a bullish view on the index based on the earnings and the Fed’s dovish stance.