Key Takeaways:
The S&P 500 pushed to a record high on Tuesday, clearing the 7,126 level as investors shrugged off geopolitical tensions and instead focused on strong corporate earnings and upcoming economic data. The index has rallied 12.3% in just 13 sessions, a move that is increasingly being chased by institutional and retail traders alike.
"Investors caught offside by this sharp rally are increasingly turning to options to reposition their portfolio," Mandy Xu, head of derivatives market intelligence at Cboe Global Markets, said in a report published Monday. She noted that overall S&P 500 option volumes hit a record high of 6.7 million contracts on Friday.
The primary uptrend has reasserted itself with conviction, with the index holding comfortably above the 7,000 psychological floor. However, signs of anxiety are present, with the VIX volatility index jumping 9% to just over 19. Options traders are pricing in the possibility of renewed volatility, even as they chase the rally. Demand for call options has surged, with the one-month S&P 500 call option skew jumping from a one-year low to a 90th percentile high, a classic sign of "fear of missing out" (FOMO). At the same time, demand for downside protection has collapsed, with put skew falling to a 15th percentile low.
This leaves the market in a precarious position, seemingly driven by momentum while ignoring potential risks. The focus now shifts to a heavy week of economic data, with retail sales on Tuesday and Tesla's earnings on Wednesday. A strong retail number could confirm that consumer spending remains robust despite higher energy prices, providing the fundamental justification needed to sustain the market's run. Until then, traders are willing to bet the trend will continue, with bullish strategies like selling out-of-the-money put spreads on high-beta names like Nvidia and Alphabet becoming more common.
The surge in bullish sentiment is most evident in the derivatives market. According to Cboe's analysis, after initial skepticism, traders have dramatically increased their bets on further upside since April 8. The S&P 500 put/call ratio fell below 1 last week, a "highly unusual" event, according to Xu, that last occurred in November 2019. This indicates that, for the first time in over four years, more call options (bets on a rising market) are trading than put options (bets on a falling market).
This activity is not just confined to broad index products. As earnings season gets into full swing, traders are targeting individual stocks, particularly in the technology sector. The Cboe's Magnificent 10 index, which includes giants like Nvidia, Alphabet, and Tesla, has surged over 22% since the end of March, with retail investors accounting for over 80% of the volume in some cases.
From a technical standpoint, the market remains in a strong position. The S&P 500 is holding above its 21-day exponential moving average, and the daily Relative Strength Index (RSI) is in overbought territory above 70. While this might seem like a warning sign, in a strong power trend, RSI can remain elevated for extended periods as the index continues to grind higher. Key support levels are now at the 7,000 breakout band and the broader trend marker at 6,750.
The main risk is a negative surprise from this week's data. The market is counting on Tuesday's Retail Sales and Pending Home Sales figures to confirm a healthy consumer. A miss could quickly unwind the recent FOMO-driven rally. Similarly, Wednesday's Tesla earnings will be a key barometer for the high-growth tech sector. Any signs of weakness could give bears the ammunition they've been waiting for. For now, the path of least resistance remains higher, but with volatility stirring just beneath the surface, two-sided intraday swings are likely to become the norm.
This article is for informational purposes only and does not constitute investment advice.
