In the US, the market looks to be on track for a modestly lower opening. Yesterday after the bell PriceLine and Disney reported earnings misses. We believe that the market looks toppy here and could see a short term decline. One reason is that despite the S&P 500 being up the last two days, the VIX has been up as well. Typically we see the two move opposite to each other.
A rising VIX in a rising market means that traders are buying options to protect their portfolios from a decline. This indicates that there may not be many buyers at 1400 in the S&P 500 to continue pushing the market up. We recommend using $SPY August and September put spreads to reduce the impact of a market decline on a long stock portfolio. For example, with $SPY at 140.30, you can buy the Aug. 139 put and sell the Aug. 137 put for $0.45. Should the market decline and close below 137 at August expiration the trade makes $1.55 on only $0.45 of risk.
In uncertain markets like this investors should stick to quality stocks and only take trades with the best risk/reward ratios.