Stock rallies since the election of President Donald Trump have been nothing short of impressive, with the SPDR S&P 500 ETF (SPY, Financial) showing gains of more than 15% since the November results were confirmed. For individual stocks, these types of numbers might seem less than notable. But when we see these types of moves in a major stock benchmark, it is time for investors to start taking a more protective stance so that gains are not eroded by external shocks over the next few months. This can be achieved through diversified positions with the best online brokerages and attention to the market events that are likely to increase market volatility during this period.
Stock optimism
While it is true investors should be taking a more proactive and protective stance in the markets, this does not necessarily mean the rallies we have seen this year are completely unjustified. The Trump administration has already enacted many pro-business policies and agenda items that should spur growth over the next several quarters. But the real question is whether or not the latest moves will be matched by corporate earnings results in ways that actually satisfy market expectations.
With stock prices and market valuations the way we see them currently, there is nothing wrong with trimming back positions and taking some gains off the table. Even if you are not entirely bearish on the stock space, investors can use options strategies to hedge against downside potential in any of the asset sectors that could be vulnerable to potential disappointments this earnings season.
Potential risk levels
Widespread stock optimism can make it difficult to assess the trajectory of the market in an accurate or objective way, and gains like those we have seen over the last few months certainly qualify. Preferred outlook is to wait for pullbacks in the S&P 500 ETF and then reposition at lower levels.
To the downside, the first level to watch comes in at 240.40, which is historical support and a Fibonacci retracement level of the recent move higher. Any breaks here would suggest a shorter-term top is in place for this part of the rally. When you are trading these types of situations, it is important to use a reputable broker that can help protect your account against slippage and renewed volatility.
Stock instruments like the iPath S&P 500 VIX ST Futures ETN (VXX, Financial) are still trading at historically low levels, but this is not a scenario that can last forever. Rising volatility could take some stock investors by surprise if we see substantial profit-taking once these rallies start to show some signs of reversal.
Disclosure: The author has no position in any stock mentioned.
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