Options traders are betting on more gains in the S&P 500 Index after it hit a record high on Friday.
A slew of bullish wagers shifted the yardstick of what’s seen as the upper bound of the US benchmark’s trading range. The so-called “call wall” has moved to 5,000 points from 4,800 — signaling that traders see the market clearing the next hurdle toward further gains, according to SpotGamma data. That points to a further 3.3% of upside, based on Friday’s close.
While options traders turn more bullish, lower earnings expectations — which makes upside surprises easier —and a potential supportive message from the US Treasury are among catalysts that could see the wider market helping keep the equity rally going.
Source: Spotgamma
The shift in the options market structure is “inviting a climb higher,” said SpotGamma founder Brent Kochuba. The move was driven by a pattern of call buying, especially chasing index-heavyweights such as the “Magnificent Seven” group of tech megacaps that include Apple Inc. and Amazon.com Inc.
Upward momentum has been building in stocks, as economic data remained resilient and helped the correction seen in the first few trading days of 2024 to be short-lived. While bullish macro prints are changing trading approaches to early rate cut predictions, they bolster the notion of a hard landing being avoided.
US stocks were set to extend gains on Monday, with futures on the S&P 500 up 0.3% and on the Nasdaq 100 up 0.5% at 08:47 a.m. in New York.
Call option trading volume saw a spike on Friday, suggesting more upside chasing by investors, while net future positioning on the Nasdaq 100 Index has moved from almost flat to significantly long in just six weeks.
And while some momentum indicators had weakened in the first two weeks of January as the market pulled back, the pendulum is already swinging into the opposite direction. Readings for the Nasdaq 100 Index are positive and even a touch overbought again. Other benchmarks such as the S&P 500 Index are improving, allowing for more gains.
More fuel for the rally may come from investors building exposure based on volatility. The VIX future curve has shifted lower over the past month and might further see downside pressure when hedges are being unwound and option dealer positioning adjusts to a market moving higher.
This could then “act as a slingshot into the virtuous cycle for equities, as fading volatility will generate mechanical reallocation flows from systematic investors,” said Nomura strategist Charlie McElligott. “The path to fresh all-time highs in the second half of 2024 is certainly still there.”
And while there are still many ‘what if’ questions for investors to answer for 2024, the lowered earnings bar and the US Treasury quarterly refunding announcement later this month could help keep the rally going for now.
“With volatility selling and passive bids still intact, the bears have less than a leg to stand on. The bear dance may be elegant, but it’s simply not selling tickets,” strategists at Tier1Alpha wrote in emailed comments.
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