When investors notice unusual trading activity in any stock, they usually pay dividends to watch out for the reasoning behind the buying activity so that they can also get behind whatever fundamental factor is acting as a tailwind for the underlying company. In this case, unusual trading activity has been spotted, though not in stock and not in a company.
[content-module:CompanyOverview|NYSEARCA:SPY]This time, up to $1.8 million worth of call options were spotted as a Buy in the SPDR S&P 500 ETF (NYSEARCA: SPY) last week, and here is why $1.8 million in call options means a lot more than the same amount in pure stock. Options carry two fundamental differences, leverage and timing, meaning if an option buyer doesn’t get the direction and timing of a stock’s move right, contracts can expire worthlessly and cost 100% of the initial position.
With this in mind, the notional value of this $1.8 million bet could be tenfold, showing retail investors the level of conviction this trader had when taking on this view. The next logical question is whether this view relies on the S&P 500 making a new all-time high, and the answer can be found inside the price action of other related asset classes and how they behave in the function of the broader market’s path today.
Risk Appetites Show a Key Pivot For Markets
One of the first places investors can stop in their search for answers is risk appetite, a gauge that can be studied through the price action in other assets that are considered “Risk on”. This is why some of the world’s best investors attribute their success to employing a global macro strategy, where watching all markets can save them from unforeseen losses.
On that note, the price of Bitcoin (one of the riskiest assets in the market due to its volatility) has plunged from its all-time high to a current level of just under $80,000. This near $30,000 decline in the price of the cryptocurrency is a clear sign that both retail and institutional investors are not looking to stick around to find out where the market goes.
By getting out of risky assets, investors can somewhat assume that risk appetites are on the decline. However, that’s only half of the equation. The other half should come through a balancing force, a flight to safety, as it’s referred to whenever capital leaves risky assets.
For this view, the iShares 20+ Year Treasury Bond ETF (NASDAQ: TLT) can be of significant use, as bonds are typically the first place investors worldwide run towards in times of fear. Considering that this exchange-traded fund (ETF) has run up to 5% in the past month alone, the theme is starting to become a bit clearer.
However, that doesn’t yet clear the S&P 500’s question, which now might be tittering between a potential rebound or the proper beginning of a bear market.
[content-module:TradingView|NYSEARCA:SPY]One Indicator Still Stands to Save The S&P 500
Over the past quarter, price action, another indicator of economic and market sentiment, still stands to support a potential turnaround in the S&P 500. That is the way markets think of and trade growth stocks versus value stocks. While not quite the same, this is a similar comparison to risky assets (growth) and a flight to safety (value).
Considering that the iShares S&P 500 Growth ETF (NYSEARCA: IVW) has outperformed the iShares S&P 500 Value ETF (NYSEARCA: IVE) by just over 5% during the past quarter, investors might be safe in assuming that recent volatility hiccups might be only temporary.
The reason is that, as growth stocks like the technology sector outperform value stocks, the flight to safety has not yet made its way through the rest of the market. This is especially the case, considering that the bond ETF still has a long way to go before it even gets close to its 52-week high.
This could be why, as of Friday, February 28th, the S&P 500 finished the last trading day of the week by rallying just over 1.5%, a sign that these sentiment gauges are potentially beginning to work in favor of a longer turnaround in the index.
Whether this $1.8 million option trader considered these indicators or not, they are still very important factors retail investors can consider today to keep the odds in favor of their portfolio’s future upside. Whenever these gauges begin to shift, they can adjust not only their portfolios but also their market views.
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