Identifying a bubble as it forms can be challenging. Some argue that the excitement surrounding AI-related stocks (especially NVIDIA) signals a bubble, while others see the company’s surging sales and profits as justifying its swift rise. Comparing this growth to past instances of overvalued, insolvent companies, some find the current market less speculative. Despite concerns about inflation data in mid-February, the enthusiasm for tech companies propelled the S&P 500 past the 5000 mark in February.
Outside of the mid-month selloff due to hot CPI data, the S&P index experienced minimal declines. The limited pullbacks were insufficient to materially impact our long put spreads in the Directional Spread Strategy, resulting in a modest loss. Lower volatility has led to appealing trade opportunities, presenting some potentially lucrative spreads, but these positions will need a degree of market pullback to achieve profitability. The market’s concerns over a multitude of issues may be the source for such a pullback.
The Tactical Strategy managed to identify profitable trading opportunities despite the low volatility, achieving a net gain for the month. Even with a low VIX, option credit spreads provided profitable opportunities, which we capitalized on. The multiple crosscurrents confronting market participants are keeping values firm in the deep-out-of-the-money options we often prefer to trade, but we anticipate that one or more of these ongoing issues could be the proximate cause for a coming volatility expansion.
The US stock market continues to defy gravity, held aloft by a dwindling number of leaders. As this advance continues with increasingly narrow support, the risk of a dislocation increases. A variety of factors could trigger such an event, but regardless of the specific catalyst, a significant market decline could occur simply as a result of reversing recent gains. NVIDIA’s value has roughly doubled this year, making it one of the largest components in the index. If this trend were to reverse, it could trigger further selling and create a precarious situation in a market that lacks widespread support.
