2 SPX Strategies to Consider as 2023 Winds Down

An obvious risk to bulls is a repeat of the late-July through late-October price action

Senior Vice President of Research
Dec 11, 2023 at 8:49 AM
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“…note that SPX 4,606 now resides just overhead and is the site of the late-July intraday high before a correction into October. This level is exactly 20% above the SPX’s 2022 close. As such, a short-term risk is those that are thinking “breakeven” relative to the July peak using this rally as a “second chance” to lighten up on equity exposure.”

Monday Morning Outlook, December 4, 2023

On Friday, following the release of the stronger-than-expected November employment number, we saw a mixed reaction from market participants. It was mixed in terms of the initial reaction being bullish, as investors welcomed signs of a still strong economy that could signal strong earnings in the months ahead.

But sellers also stepped in Friday morning when the S&P 500 Index (SPX – 4,604.37) hit the 4,606 level, amid rising interest rate expectations. Per the excerpt above, the Friday high was discussed as a potential resistance point last week.

This level is precisely 20% above last year’s close, and long-time readers know the historical importance of round percentage levels relative to a key high or low or year-end close. In fact, as I said last week, 4,606 marked the late July peak prior to a three-month, 11% from intraday high to intraday low.

As the SPX probes its July peak, an obvious risk to bulls is a repeat of the late-July through late-October price action, or something worse. That said, one differentiator is Friday’s candle, with the SPX closing near its high of the day amid an afternoon rally back to the 4,606 level. This is unlike the bearish “outside” day in late July when profit-taking came in heavy at 4,606.

Given that no one knows with 100% certainty what the immediate future holds, bulls may consider hedging in case a “double-top” pattern unfolds. Equity index or exchange-traded fund (ETF) put options are typically used to purchase portfolio insurance and with the Cboe Market Volatility Index (VIX – 12.35) around its calendar year lows, portfolio insurance is relatively cheap, especially with the Federal Open Market Committee (FOMC) meeting this week. 

After the past two FOMC meetings, substantial downside and substantial upside immediately followed, so there may be interest in hedging FOMC-related uncertainty.

A suggested hedge is not a market call implying the market is headed lower. In fact, from a technical perspective, other than the SPX’s July peak just overhead and the index’s short-term “overbought” condition (which has been the case since early November), the technical backdrop is bullish from both a short-term and long-term perspective.

That said, it is better to hedge when portfolio insurance is low, rather than hedge when a technical breakdown or unforeseen macro event surfaces that causes portfolio insurance to spike higher amid a sudden, steep selloff in equities.

Based on the SPX’s 20-day moving average daily rate of change, it will be around 4,550 at this time next week and could be supportive in the coming week if a pullback materializes. In fact, by mid-week, the 20-day moving average will be around 4,530, which I view as a key level; it is the August high and 10% above the October closing low.”

- Monday Morning Outlook, December 4, 2023

Or stay the course with no hedge but a concrete plan to purchase portfolio insurance if future price action signals that a double-top is becoming an increasing danger.

For example, as discussed last week, I view the 4,530 level as an important support level, as it marked the peak after a mini rally in August and is 10% above the October closing low. A break of this level could have bearish consequences.

Another option you can implement in the coming days, if taking the “wait and see” approach, is keying on the SPX with respect to its 20-day moving average before implementing a hedge. This short-term moving average enters the week just above 4,530 and is currently rising seven points per day.

Based on its current rate of change, it will soon be around the potential trendline resistance that I had discussed in previous weeks connecting the January 2022 high with the July peak, a break of which could have negative short-term implications for the market.

Note that the early-August, mid-September, and mid-October closes below the 20-day moving average preceded short-term selling, with the first close below this moving average in early August foreshadowing the corrective move into late October. The mid-October close below its 20-day moving average preceded the last of the selling into the eventual late-October trough.


Turning to sentiment, I believe that there is life in this rally into at least year end, based purely on observations I have made using the analyst community as contrarian indicators in 2023.  For example, in April through mid-June, a multitude of Street strategists were making bearish short-term noises. But what followed was sideways action in April followed by a late-May through late-July rally. At least two strategists shifted to the bull camp in late July, coincident with the top.

From Nov. 20 through early last week, negative commentary has come out of the analyst community. It reminds me of the early April through mid-June period when they were dead wrong about the short-term outlook.

For example, “risk of disappointment in the near term, “priced for perfection,” “vulnerable to profit taking or consolidation,” “rally running out of steam,” “near term volatility in both rates and equities” and a projection for SPX 3,500 is what I have seen from the strategist community. The negative outlook in the near term could mean that this rally persists longer than the collective opinions of this group.

In fact, the sentiment in this group reflected observations that I have made the past few weeks with respect to short-term option players making bets against the SPDR S&P 500 ETF Trust (SPY – 460.20) since the current rally began. This negative sentiment is not as persistent as prior weeks, suggesting there has been some capitulation, albeit not what I would consider an extreme in optimism that represents a serious sentiment risk.


Speaking of the options market, this week brings us the last standard expiration week of the year. The 2018 standard December expiration week stands out to me, when the Fed was talking interest rate increases amid uncertainty related to a high-profile trade spat with China. Market participants did not like the uncertainty, especially as the Fed indicated rate hikes. As such selling generated more selling in the form of a delta-hedge selloff that week.

As such, I was curious about the SPX’s price action during December expiration week since 2018. Per the table below, we have seen decent directional movement, with absolute returns ranging from 1.25% to 7%, three negatives and two positives, with the last two being negative. A higher market this upcoming week would even the score.


The good news for bulls, upon reviewing SPY open interest (OI) for Dec. 15 expiration options, is that there is no immediate threat of a delta-hedge selloff. Delta hedge selling occurs when big put open interest strikes below the market act as magnets, because those that sold the puts are forced to sell S&P futures as the SPY approaches those strikes and the put options become more and more sensitive to the SPY decline.

Per the SPY open interest configuration chart below, the SPY would have to retreat to the 435-strike for delta-hedge selling risk to grow substantially. This is the first put-heavy strike of significance below the market and is situated more than 5% below Friday’s close.

Delta-hedge selloffs are more likely when heavy put strikes are just below the SPY as expiration nears. This does not mean selling won’t transpire during expiration week, but it does suggest that the odds of delta-hedge selling that contributed to a steep, sharp selloff like we saw in 2018 are significantly reduced.


Todd Salamone is the Senior V.P. of Research at Schaeffer's Investment Research.

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