Markets are extending yesterday’s massive rally, as hopes for a deal in Washington continue to grow. Over the past two sessions, the S&P 500 has erased the selling from the past 8 days, and it appears that the bulls are once again in control of the market. Today’s leader is the Russell 2000, which is higher by about 1.2% as the appetite for risk is back. The S&P 500, Dow, and Nasdaq are each higher by about 0.6% for the day. Despite the strength in stocks, bonds are catching a bid as well. This relationship should be watched closely going forward. Metals are sharply lower today, as a big seller emerged early this morning. Gold and silver are both about 1.6% lower for the day.
CHART OF THE DAY
SPDR Barclays High Yield Bond ETF (JNK) – JNK mimics price action in the junk bond market, and it appears that it could be ready for a big move. Not only do we have the looming situation with the potential U.S. default happening, but also the chart is coiled tightly in a symmetrical triangle formation and appears ready to make a big move. Additionally, you’ll notice the Bollinger Band width(bottom pane) is at an extreme low. Previous pullbacks near this area have preceded big moves by the ETF. Despite the macro headlines, options on JNK are currently very cheap. In fact, these options are priced in the bottom fifth of all readings taken over the past 52 weeks. This makes a long volatility strategy very attractive at this point in time.
Subscribers of Schaeffer’s Volatility Trader service received this recommendation earlier today — I like buying a November 40-strike straddle for about $1. This trade will profit on a move above $41 or below $39 by November 15th.
WHAT I’M EXPECTING
The S&P 500 retook the key bull/bear zone of 1680 and is currently trading around 1700. I would expect some sort of consolidation over the next few days before eventually showing its hand for the next move. That said, barring any catastrophic news out of D.C. I think we are poised to challenge the recent all-time highs again.