Here's What to Do About This Market Rally

I could almost hear the sigh of relief from Cincinnati when the Friday jobs report came in higher than expected.

It was useful to note that stock futures didn't really move lower, but the Treasury yield did. That, my friends, is a pretty clear sign that the market is absolutely, positively counting on the Fed to juice the market with another rate cut in 12 days.

Now, interestingly, the last Fed meeting saw a drop in rates just as the market anticipated.

The S&P 500 was around 3,015 just ahead of the announcement. At the time of writing, we're at 2,983.91 - and trying like mad to get back to 3,015 just before the next meeting that is likely to yield the same action from the Fed.

So here's how I think it'll play out - and what you should do about it...

Why the Market's So "Hazy" Right Now

The headlines that fueled the rapid rally last week and yesterday were spurred by the announcement that negotiators from the United States and China will meet in Washington, D.C., in October after some pre-meeting calls in September.

The news got everyone hyped about a deal happening, and boom goes the rally. But now, though, I'm detecting a little more... let's call it... "ambiguity" in the administration's comments.

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For instance...

  • "The United States wants to pick up from where it left off in the May trade talks."
  • "There has been no specific date set for October trade talks."
  • "The administration does not want to speculate if the October tariff rate increase will be delayed; that is the president's decision."
  • "If there are no results from upcoming meetings, additional actions will be taken."
  • "China should not underestimate President Trump's will on China and the bipartisan support he has on this issue."
  • "President Trump will not relent on this trade dispute."

For what it's worth, I believe that the trade war may ultimately be a positive pivotal point in our long-term economic picture - we just have to make it through.

That said, the constant stream of headlines, comments, no comments, allegations, etc. continues to cast a haze over the market.

These comments made me think... "Here we go again."

Now, the one clear thing that we can count on in a hazy market is the technicals.

Here's What the Market's Telling Us

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The S&P 500 surged above its 50-day and 20-day trend lines. Take a look at this fresh chart.

That's good news for any bulls. That trend line has been like a gearshift stuck on "N" - neutral - lately.

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This fresh move, overall, is a positive for the market's outlook. It's telling us to get ready to pull the trigger and shift our stance to bullish-neutral.

And I say "get ready" and not "move" because small-cap stocks - the natural home of market risk appetite and speculative "juice," the lifeblood of any sustainable bull run - are still sluggish.

Take a look at the Russell 2000 Small-Cap Index; it's still treading water beneath its 50-day trend line.

So the S&P 500 and Russell 2000 are telling me stocks want to pop, but they don't yet have sufficient gas to do that - at least not in any long-term way.

Then there's the CBOE Volatility Index (VIX). It's actually trading around 15 to 15.57, in fact, as I write Monday afternoon - for the first time since the end of July. If the VIX moves just a little lower, below 15, it'll be like catnip to buyers, bringing them into the market and moving stocks higher ahead of the Fed meeting later this month.

And that brings us to my major beef with this rally: Trading volume is still light. Light volume means we can see stocks reverse quickly. If you pivoted to a fully bullish stance, you'd run an outsized risk of getting burned. But if, as I said, buyers are tempted into the markets by a lower VIX reading, we'll see volume get healthy again in a hurry.

"Now wait a minute," I can hear you say, "I thought we were supposed to get clarity from these technicals and charts; this still looks pretty indecisive."

And you'd be right. But the bottom line is all the technicals are saying the market is "decidedly indecisive" right now.

Frankly, the technicals are beginning to suggest a short-term shift higher. We may be in for a "buy the rumor, sell the news" market that bookends the Fed meeting this month.

So here's how to make some money while we wait here for the "bull bus" to come pick us up. These are some cautious moves that'll give us a bit of exposure to modest profits as the rally gathers steam, but won't risk too big of a loss should the rally sputter out.

We're trading options on two exchange-traded funds - the SPDR S&P 500 ETF (NYSEArca: SPY) and the iShares Russell 2000 ETF (NYSEArca: IWM) - that track the performance of the broad S&P 500 and the small-cap-centric Russell 2000.

The IWM Sept. 20, 2019 $152 calls (IWM190920C00152000) make for a cheap bet that lower volatility will bring out the all-important small-cap buyers, while the SPY Sept. 20, 2019 $298 calls (SPY190920C00298000) gets us exposure to stocks that want to go higher, and probably will, but might not have what it takes to get there.

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About the Author

Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.

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