The S&P 500 has achieved 38 new all-time highs in 2024, making it one of the most successful years in nearly a century. Nonetheless, last week was not very favorable for the index, as it experienced its worst week since, and although it has managed to start off this week on a positive note, there is a big possibility for the downward trend to continue.
One of the key reasons behind the S&P 500’s notable downfall was the concerns about the U.S. potentially adopting a tougher stance on China and Taiwan. Let’s remember that these countries provide the chipmakers essentially used in the tech sector, thus, any geopolitical tensions that may impact them could also have ripple effects throughout the tech industry. There could be supply chain issues, increased costs, and potential delays in product development and manufacturing, and as a result this, the performance of tech stocks, which have been a major driver of market gains in recent years, could be negatively impacted.
In addition, the S&P 500 seems to be following a trend that has been very common since 1928.
Historically, the market tends to underperform during the summer, with various factors such as reduced trading volume and the vacation season contributing to this phenomenon. During many years, August has seen some of the worst outflows from passive equity and mutual funds, and this year appears to be no different as most capital has already been deployed for the third quarter, leaving little room for new investments. Additionally, this seasonal weakness is compounded by the current market conditions, which are already stretched.
When the market is described as stretched, it means that many investors have already made their investments, leaving little room for additional buying. This situation can create a precarious balance, where any negative news or unexpected events can trigger significant market declines. And although optimists might argue that several potential catalysts – such as strong earnings reports, a possible near-term interest rate cut from the Federal Reserve, and the increasing odds of a favorable political outcome – could boost the market, they are likely already priced into the market, which means that there is limited potential for further gains.
Furthermore, there is a bar set very high in regards of the upcoming earnings. The expectations, particularly for the biggest technology stocks that have driven the market to record highs, are exceedingly high. Therefore, these companies must deliver exceptionally strong performance to provide any further boost to the market, otherwise there could be significant declines.
Moreover, given the current market conditions, you might consider a strategy involving Nasdaq 100 and S&P 500 December lookback put options.
Lookback put options are a special type of option that allows you to “look back” over the option’s life and choose the best price at which to sell. Therefore, if you buy a lookback put option for the S&P 500 or the Nasdaq 100 that expires in December, you can sell the asset at the highest price it reached during the period the option was active.
For instance, if you buy a lookback put option for the S&P 500 that expires in December, and let’s say the index reaches a peak price in September, but it then decreases by December, you can choose to sell at the peak price from September, even though the market price when the put option expires is lower.
In essence, although the S&P 500 has indeed experienced significant growth this year, we should definitely be on the lookout for a possible market correction. And as stated before, if you want to protect your portfolio against the possible market downturns, investing in a lookback put option might be the most appropriate way to do it, as it can help you to maximize your returns by giving you the flexibility to sell at the highest price the asset reaches within the option’s timeframe.
