The market looks poised to put in its 4th week higher of the last 5, somewhat shrugging off last week's steep sell-off. Despite that, there are a lot of itchy trigger fingers out there. The types of stocks making headlines are usually the types of stocks you see flying higher towards the end of a rally. And obviously there's been a ton of hype over the past few weeks on the type of traders flooding some of these smaller cap stocks.
Here's a good think to keep in mind about the timing of this rally and what may come next when new minted traders either head for the door or get burned badly for the first time, from RiskReversal:
I suspect Davy Day Trader is going to drop the mic as soon as the NBA restarts in July and his timing of riding the momentum of the hardest hit “pandemic stocks” off of the March lows will allow him to claim the title as the “new captain” until the next time he is either bored with sports coverage or gets the trading itch again. Maybe I am one of those suits he rails against on Wall Street (I only have two and only wear them at Weddings and Funerals), the old school guys who are missing out on the fabulous gains to be reaped on a daily basis in the planes, trains and automobiles trade, but as someone who has traded through three massive bull markets, and three subsequent crashes in less than 25 years I am here to tell you that the last few months of money-filled pillows are not what you think they are, and this environment is not likely to last too much longer.
Despite that narrative of the small cap stocks being gunned higher by a wave of new traders, the IWM (Russell 2000 etf) has not drastically outperformed its big cap brethren over the past month. Here it is vs the Dow, Nasdaq and S&P over the past month, via TradingView:
That's probably indicative that for every bankrupt HTZ, or biotech stock you've never heard of short squeezing higher, the AAPL's of the world are still driving the train. But what that does mean is IWM is probably the better expression of trying to fade the mania, and likely offers more bang for the buck on any market reversal than trying to pick a top in FANG stocks.
Here's how IWM looks in the options market fo the next month, via OptionsAI technology:
For those looking to put on some short deltas, either outright, or even as a hedge versus your nervous longs, IWM makes a lot of sense, but only with defined risk.
Ways to Play
Here's a 1 month bearish view and the trades returned from OptionsAI technology:
In the GIF I compare the Long Put spread and the Short Call spread. As I've written about before choosing between those two strategies should be dependent on whether you are "bearish" (the long put spread) or just "not bullish" (the short call spread).
In this case let's focus on the Long Put spread:
It's an 11 wide put spread to the bearish consensus over the next month and costing about 3.60 of the 11 wide spread. It does not breakeven until 139.40 but then makes money between that level before maxing out below $132 in IWM.
I think that's a decent risk reward for those looking for a quick pullback over the next month. Those looking to simply fade this move higher would be better served with the short call spread but when we have seen pullbacks, even for one day they've tended to be steep. And if we saw a repeat of last week's big down day it would take IWM even lower than those lows because the ETF hasn't been able to fill in that entire gap (as you can see on the chart above).
See a part of OptionsAI technology with your own price target and demo trades in AAPL HERE