The stock market is at such a critical juncture here, and following this morning’s hot CPI print, the reaction to this data will likely determine the market trend over the next three-to-five months. I continue to be bullish, but I am keenly aware of the macro, fundamental, and sentiment-driven risks facing this market that has moved into all-time highs. I’m going to outline our approach to handling a possible pullback from all-time highs following the CPI that calls the 2024 Fed rate cuts into question. I’m using the S & P 500, Nasdaq-100 and an option hedge I may implement personally, and for my research and wealth management clients. I can remember only a few other times in the past 20 years that I have been so laser-focused trying to nail down the next three-to-five months’ market direction. And after thoroughly examining every market data point and indicator we watch, I can tell you the next 10%-15% move is either higher or lower than from here. Let me explain. Following a horrible bear market from 2021-2022 we spent most of 2023 rallying and here we are at new all-time highs. The S & P 500 weekly chart shows a basic 5-wave Elliott trend that consists of 3 separate market advances labeled as 1,3, and 5. Between those market advances are two intervening market corrections labeled as 2 and 4. This is a textbook pattern that tells us to expect a correction recapturing between one-third to two-thirds of the prior advance, which foretells downside targets of 4,385-4,020. There are so many reasons, including persistently high inflation data, strong GDP and Q4 earnings, and a continued tight labor market that suggests the four, five Fed rate cuts so many are expecting this year may not come. How will the market handle this realization? I think that the realization process is happening now and the depths of this realization correction can’t yet be known. However, I think this is not the time to panic and take too many chips off the table after an incredible market recovery. I think it may be time to deploy an option hedge. Deploying a hedge Based on the chart above I’m pricing out a put debit spread in the July S & P 500 monthly options to protect against this ‘possible’ correction to the 5-wave advance. Specifically, I’m looking at buying the July 4,500 strike put and selling the July 4,200 strike put for a total cost of $21.00, or $2100 in premium. The spread is 300 points wide, but you’re paying 21 points so the total risk is $2100 to potentially make…
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