Asian markets have fallen after reaching recent highs in the Nikkei and KOSPI. Despite four days of selling, both indices are still above their short-term trend filter, the 1D EMA-20 Bollinger Bands. A key concern is the Hindenburg Omen appearing on the SPX, Nikkei, and KOSPI, which suggests that market momentum is weakening in the short term. This omen indicates mixed signals in the market strength, with some stocks gaining while others are stagnating or declining.

Potential Volatility

This situation doesn’t mean a market crash is imminent, but it does hint at possible volatility or corrections. Movements in Asian markets are important for understanding global risk appetite. If these markets weaken further, it may negatively affect the SPX, while stabilization could lead to a short-term reset. Current indicators show more of a cooling stage rather than an outright collapse. With warnings of breadth issues and a stable market structure, volatility might contract, possibly leading to a prolonged sideways movement or cooling phase. Staying above short-term trend bands may allow for consolidation and potential growth. Traders should view this period as a sign of future momentum. The Hindenburg Omen on the SPX, Nikkei, and KOSPI reveals that market strength is becoming uneven. This warning is significant, echoing similar breadth divergences seen in 2021 before the major market correction in 2022. This suggests that while the overall trend remains upward, the support beneath it is weakening.

Managing Risk

This situation is particularly relevant for the S&P 500, where just a few mega-cap stocks now represent over 35% of the index’s total value. This level of concentration hasn’t been seen since the early 2000s. For traders, this means that long positions in broad market ETFs may be riskier than they seem. A downturn in a few leading stocks could drag the entire market down. Considering this warning, buying protective puts on indices like the SPX or QQQ is a smart risk-management strategy for the coming weeks. This approach allows traders to maintain their core long positions for further gains while protecting their portfolios against sudden declines. It’s a way to safeguard investments without becoming fully bearish on the market. The signal for reduced volatility aligns with current data, as the VIX has remained low, around 14, for the last quarter. However, past events, such as the banking scare in 2023, show that calm periods can end suddenly with a surge in volatility. Currently low option prices make buying protection more attractive. As a result, traders might consider using debit put spreads instead of buying puts outright to prepare for a possible decline. By selling a further out-of-the-money put while purchasing a put, they can lower the overall cost of the hedge. This is an effective way to secure downside protection if the market is entering a cooling-off or consolidation phase, rather than facing a complete collapse. Create your live VT Markets account and start trading now.

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