Bull Market or Just Bull?

Welcome back to Hitting the Bid Weekly!

Around the Market

Equities have rebounded sharply since the selloff on April 21

The S&P 500 (via SPY) finally broke its winning streak to start the week. But not before posting nine straight days of gains - its longest such streak since 2004. Over the past week, SPY is up about 2.3% (from the April 28 close to the May 5 close), but that doesn’t tell the whole story. Since hitting a low of $481.80 on April 7, the S&P 500 has rebounded approximately 17%!

Making things more interesting, the S&P 500, Nasdaq 100 (via QQQ), and Russell 2000 (via IWM) have all overtaken their respective price levels from April 3. Is this the makings of a bull market or was this just a massive bear market rally? At this point, it feels like even the stock market doesn’t know the answer.

Other notable market moves since last week:

• Volatility (VIX) dipped as low as 22.34 before closing at 23.64 on May 5

• Gold had been selling off since hitting highs on April 22 but found some strength to start the week

• Bonds were strong until mid-week but have since experienced a notable selloff

• The US dollar appears to be consolidating around 99.50, seemingly undecided on its next move

• Crude oil continued its weakness, gapping lower to start the week

• Bitcoin upside momentum has stalled, as the quest back to six figures remains elusive

The Week Ahead

Economic Calendar

• FOMC - Fed Rate Decision and Press Conference (Wed 5/7)

Notable Earnings

• Advanced Micro Devices AMD (Tue 5/6 after close)

• Walt Disney Co DIS (before open Wed 5/7)

• Uber Technologies UBER (before open Wed 5/7)

• Occidental Petroleum OXY (Wed 5/7 after close)

• Shopify SHOP (before open Thu 5/8)

• Coinbase COIN (Thu 5/8 after close)

• DraftKings DKNG (Thu 5/8 after close)

Note, this list is not all-inclusive of potential market movers. These are just a few items I’m interested in for their impact on the market.

Tickers of the Week

This week, I’m watching oil for a potential trade due to a recent uptick in implied volatility and a sharp move early in the week toward the April 9 four-year low. Crude oil futures offer the right sizing for me to structure a trade with a favorable risk/reward using options spreads or I may look to micro crude contracts.

With crude trading around $59/barrel, it remains well below its 1-year high of ~$77 and is down about $5 since the most recent selloff began roughly two weeks ago. Given that, I’m interested in a long setup if price action develops in a certain way.

Here are a couple of items I’m specifically looking for:

• Price staying above the April 9 low of $54.67/barrel - If that level holds, it may be an area of support

• A green candle that closes above the prior day’s high - This could indicate bullish momentum. If that happens, I can use the previous day’s low as a stop-loss level (price in which I’ll exit the trade)

For those looking to trade a similar setup with smaller size, USO may be a good alternative. The price action generally tracks crude oil, but the fund’s structure makes it more accessible for smaller positions compared to oil futures.

What’s Top of Mind

Last week, I made a mention about staying small and how doing so helped me weather a couple of tail events I hadn’t properly accounted for. Even if a trader can estimate probabilities with near-perfect accuracy, the randomness of the market and the constantly shifting landscape of data, sentiment, and news means outcomes are never fully in their control - variance will always exist. This means that a sustained losing streak or a couple of big hits to the portfolio can be enough to blow up an account. This is why it’s so critical to stay small, i.e. properly size trades based on expected value and portfolio size.

For the fellow math nerds out there, exploring the Kelly criterion is a great way to optimize trade sizing (it’s also super helpful for sports betting). If you’re looking for a simple rule of thumb, allocating 1-3% of your total portfolio per trade, with a max of 5%, is a solid starting point. Sizing trades this way doesn’t guarantee your portfolio won’t hit zero, but if your process and strategy are sound, trading small and increasing the number of occurrences gives the range of outcomes a chance to converge toward their true probabilities over time. And hopefully your portfolio grows along the way, too.

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Hitting the Bid content is for informational and entertainment purposes only. The information contained is not, nor is it intended to be, trading or investment advice or a recommendation of any security, futures contract, digital asset or alike. Trading and investing contains risk. All investors should evaluate their own risk tolerance, financial situation, and investment duration before entering any trade or investment.