The Market’s on a Knife’s Edge – Here’s How to Make Money No Matter Which Way It Goes

|May 19, 2023

The stock market (meaning the institutional benchmark index of the market, the S&P 500) broke out of its boring sideways trading range yesterday, but there weren’t a lot of champagne corks popping.

Maybe that’s because traders and investors are afraid the long-awaited breakout is another fake-out.

The S&P 500 has been trading sideways since April, in a range between 4050 and 4190. More recently that range has been even narrower, with stocks trading between 4100 and 4150.

Now it’s important to put that into some context, that context being another measure of the market, the Nasdaq Composite. Most of the time, the major market benchmark indices (the S&P, the Nasdaq, and the Dow Jones Industrials Average) all trade similarly, meaning if you look at a chart of each of the indices they’d look a lot alike. But not now.

While the S&P 500 and the Dow have been trading sideways, the Nasdaq Composite and the Nasdaq 100 have been climbing steadily higher.

The difference is the Nasdaq benchmarks are predominated by big-cap tech darlings, including Apple, Microsoft, Amazon, Meta, and Google, and they’ve been on a tear.

The distinction is important because while the S&P 500 also claims those stocks in their makeup, their weight is larger in the Nasdaq, so it’s a better benchmark of what tech stocks are doing.

They’ve been going up on account of investors and traders betting that the Fed will start cutting interest rates, maybe in the second half of this year. Since rising rates hammered tech stocks, also referred to as “growth stocks,” it stands to reason that cutting rates would benefit those beaten-up stocks first and foremost.

So, traders and investors are, in a sense, frontrunning the Fed’s cutting rates by piling into tech stocks.

But with inflation still elevated, with rates recently rising again and increasing talk of a recession, and no talk of cutting rates, what should worry investors (and is worrying me) is how committed are investors to buying this breakout with the obvious headwinds everyone’s feeling.

In essence, the market’s balanced on a knife’s edge. So today, I want to get tactical: I’m going to tell you exactly how you’ll know whether we’re in for a nice ride higher or a fall off the proverbial cliff, and how you can make money either way.

Let’s get started.

Here Are the Key Support and Resistance Levels to Look For

So, big-cap tech stocks have had good earnings for the most part and have become so-called safe-haven stocks with lots of liquidity.

But it’s been frustrating for traders and investors watching the S&P 500 trade sideways while the Nasdaq has been climbing. They look at the S&P as a broader measure of the market and the economy. And some, who are smart enough, question the rise of tech stocks when the Fed’s nowhere near cutting rates and to the contrary are pushing a “higher for longer” narrative as opposed to any Fed talk about cutting.

But now that the S&P 500 has broken out of its malaise market sideways move and got above 4200 yesterday, though it closed at 4198, the hope is the breakout will attract sidelined money and “the market” will start climbing, which would bring in more sidelined money parked in money market funds and lead to FOMO (fear of missing out) buying as stocks keep climbing.

At least that’s the stampede bulls want to see. And we may see it.

If this breakout holds, which means the S&P 500 can move above 4200 and trade above there (especially if it can get to 4300 for at least a couple of weeks without falling below 4150), it’s time to join the party.

While we’re trading above 4200, if we can stay above that level, it makes sense to start buying stocks you want to own, which should include all the big-cap tech names that have already been moving higher and solid companies with decent dividends that have been trading at a discount. Call options and call spreads on index ETFs like the Invesco NASDAQ 100 ETF (QQQM) and Invesco QQQ Trust (QQQ) wouldn’t be a bad idea either.

But, and it’s a big but, the breakout could end up being a fake-out.

We’ll know if it’s a fake-out if the S&P can’t hold above 4200, if it backtracks down to 4150 before it gets to 4250.

And look out below if we break back below 4150 and test 4100. That will likely mean we’re going lower, maybe a lot lower, as most of the traders and investors who rode the big-cap tech names up will be taking their profits on the way down.

If that happens, it’s time to batten down the hatches: have your stops in place to protect your profits on anything you got a nice pop from, and then start buying puts and put spreads on those same benchmark ETFs I named above.

Another tool in your arsenal here is to target specific sectors that are experiencing major capital shifts and capitalizing on those. Oil is one of those sectors right now – even though the price of oil has fallen 33% on the year, American oil production is through the roof. There’s a giant land grab happening right now in the United States’ biggest shale basin, with oil firms across the globe rushing in to scoop up prime drilling sites.

These companies are spending billions to make these deals, and investors who move quickly have the potential to walk away with a boatload of cash. Here’s what you need to know

Shah Gilani
Shah Gilani

Shah Gilani is the Chief Investment Strategist of Manward Press. Shah is a sought-after market commentator… a former hedge fund manager… and a veteran of the Chicago Board of Options Exchange. He ran the futures and options division at the largest retail bank in Britain… and called the implosion of U.S. financial markets (AND the mega bull run that followed). Now at the helm of Manward, Shah is focused tightly on one goal: To do his part to make subscribers wealthier, happier and more free.