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Julian Emanuel, chief equity and derivatives strategist at BTIG
- Julian Emanuel, chief equity and derivatives strategist for BTIG, says a string of critical events in the next 100 days will set the course for stocks, interest rates, and currencies for the following year.
- With stocks high, volatility low, and so many important developments to come, he's picked three options trades that could help investors profit no matter how events play out.
- Emanuel says events including trade negotiations and debt ceiling talks could help boost the S&P 500 to a record 3,200 or knock it down to its 200-day moving average of 2,782.
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If you're investing in the stock market, you might not get much of a summer vacation.
While the market might look stable on the surface, a string of events connected to the trade war, the Federal Reserve, and other critical areas are lurking. If that's not ominous enough, Julian Emanuel - chief equity and derivatives strategist at BTIG - says they could direct how stocks, interest rates, and currencies go for the following year.
"Major inflection points - implying the potential for huge price moves in a direction not yet determined - are forming amid subdued volumes and volatility," he wrote in a client note.
He says the trade war, US debt ceiling, and Brexit will be critical. Not to mention the actions of global leaders like US President Donald Trump, Chinese President Xi Jinping, Speaker of the House Nancy Pelosi, likely British
"It's really not an exaggeration to say that the decisions made by these public figures over the next 100 days could chart the course for markets into the 11/3/2020 U.S. Presidential Election," Emanuel said.
In the chart below, Emanuel illustrates that stocks are at new highs while volatility as measured by the Cboe Volatility Index (or VIX) is near its lowest ever. He theorizes that they're either going to keep busting records together, or they'll return to something closer to normal.
BTIG and Bloomberg
While the benchmark S&P 500 is at record highs, the VIX, Wall Street's "fear gauge," is approaching its lowest mark ever.
Emanuel says he thinks the S&P 500 could fall to its 200-day moving average of 2,782 or rise as high as 3,200 depending on how all of those events develop. While he considers the lower figure more likely, with the market being pulled in that many different direction, Emanuel says it's a good time to trade options.
"Inflection points and low volatility make the limited risk/theoretically unlimited reward profile of option ownership appealing as a means of expressing core convictions," he said.
That leads to these three specific options-trading recommedations. All quotes attributable to Emanuel.
Financials Select Sector SPDR ETF, Buy December calls at a strike price of $29
"We continue to see rotation into value-priced Financials - NTM P/B is near a historical low - as critical for further broad market upside, with tailwinds being the prospect of a steeper yield curve driven by a suppressed short end and a higher 10-Year Yield, as well as substantial capital return."
Consumer Discretionary Select Sector SPDR ETF, Buy September puts at a strike price of $122
"Geopolitical discord and trade tensions have eroded consumer confidence from cycle highs in 2019. Potential stumbling blocks - both at home as Washington prepares for yet another budget and debt ceiling debate, and abroad with some retailers warning of higher input costs, output demand headwinds, and supply chain disruptions resulting from the Trade War - could pose a risk to elevated valuations."
Emanuel uses this chart to show that slumps in consumer confidence has dropped and it could hamper retail sales, and thus discretionary stocks.
Bloomberg and BTIG Dips in consumer confidence are often tied to weaker retail sales, according to Emanuel.
Utilities Select Sector SPDR ETF, Buy September puts at a strike price of $60
"The sector notably lagged the broader market even as rates moved lower in June. Higher yields, as the Fed attempts to support inflation expectations and while markets may be overpricing more aggressive rate cuts, could see underperformance deepen."