Most of the attention in stock markets has been focused on the major benchmarks. This has been the case in several regions around the world, but these trends have perhaps been most prevalent in the United States, where both the S&P 500 and the Dow Jones Industrial Average dominate. This, of course, is often the case, but the attention here has reached levels that are far beyond normal, but this is not entirely surprising given the fact the S&P 500 has reached a new record almost 90 times since the Donald Trump was elected president last year.
So the real question here is whether or not the bullish trend can continue. We have seen progress made in terms of the legislative agenda in the U.S. and a lower corporate tax rate should improve the earnings outlook well into next year. If this leads to positive market surprises once earnings season rolls around, this could generate additional price moves higher in the Dow Jones and S&P 500 metrics.
In recent quarters, the Nasdaq has been a particularly strong standout with several significant stories supporting the technology sector. This type of scenario typically favors the tech space, which translates to better gains in instruments like the Nasdaq. Low interest rate levels should support consumer spending activities through this year's holiday season, which could suggest a primary scenario for those looking to implement options trading positions.
At the macro level, investors will be forced to consider the fact global interest rate levels could remain subdued for some time. In the alternative scenario, the pro-growth agenda being promoted within the U.S. economy could push central banks toward more aggressive tightening policies that may constrict market valuations in equities in the late months of next year.
From an investment perspective, this favors certain types of directional strategies over others. Since there is really nothing at this stage to suggest a higher possibility for negative earnings surprises, call options during dip periods look to provide extremely low risk levels given the market implied volatility readings that have been seen over the past five quarters. There is still scope for downside, but in order for this to occur we would likely have to see earnings misses from several large blue-chip stocks in different sectors.
This has not been seen (with a potential exception in energy), but if this type of scenario does begin to unfold, we will likely have more of a warning signal in order to position from the other direction. Until then, expect the dominant trend to continue at relatively similar momentum levels.
Disclosure: The author has no position in any asset mentioned.
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This article first appeared on GuruFocus .
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
