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Feb 27, 2022

S&P’s Leaders and Laggers of 2022 So Far

By:James Blakeway

It’s been a rough two months for equities to start off 2022. Despite a strong reversal rally after the initial Russian invasion of Ukraine, the S&P 500 index ETF (SPY) was still down nearly 10% year-to-date. It’s been clear the overall sentiment towards equities shifted to start the Near Year. Realities set in that the U.S. Federal Reserve is set to raise interest rates multiple times this year. This shocked technology stocks hard as their access to cheap debt to fuel growth will be impacted as we continue in 2022. 

S&P 500 Sector Performance Year-To-Date

We previously analyzed how the individual sectors of the S&P 500 performed in 2021 relative 2022. Given the recent turmoil for the start of 2022, it’s worth checking in again to see how the sectors are performing. 

Perhaps unsurprisingly, the energy sector ETF (XLE) shows the only positive return of the 11. U.S. Crude Oil Futures reaching $100 for the first time since 2014 as fueled rallies in large energy producers such as Exxon Mobil (XOM), Chevron (CVX), and ConocoPhillips (COP). This comes on the heels of an extremely bullish 2021 for the energy sector, which saw a greater than 50% return to rebound from the pandemic dip of 2020.

The three hardest hit sectors of the S&P so far this year are Communications services (XLC), Technology (XLK), and Consumer Discretionary (XLY), which combine to make up more than 50% of the overall index.

S&P 500 Market Volatility 

Due to the market’s overall downward trend but also aggressive intraday rallies, there is heightened uncertainty as to the future movement of equities. This is leading to higher implied volatility across the S&P sectors, as well as the overall index. Higher implied volatility translates to higher options prices, which can mean more opportunity for traders looking to sell either options or options spreads. More importantly traders utilize implied volatility rank (IVR) which indicates how high implied volatility is relative to the last year for that specific stock, or ETF. 

All 11 sector ETFs have an IVR over 30, a lower and considered minimum threshold for options selling, while 5 of ETFs have an IVR over 50. This means that, provided there are liquid markets, traders can likely pick an ETF that fits their bias and portfolio due to heightened volatility across the board.

A lower risk way to trade these ETFs with heightened implied volatility and uncertainty would be utilizing short call or put spreads to express a directional bias or an iron condor to express a neutral bias. A short spread utilizes one short (sold) option away from the current price and a long (purchased) option further away than the short options. An iron condor combines both a short call spread and a short put spread.

Trade all the S&P500 sector ETFs on tastyworks, open a trading account

S&P Sector Outlook and Trade Setups

We used the Alpha Boost system to find a bullish, bearish, and neutral trade for XLK, the technology sector ETF.

This aggressive put spread may work for traders who are convinced XLK will rally between now and April expiration. The trade is set up by selling a 153 put option while buying the 148 put option in a single order. The trade requires $333 in capital and would yield a 25% return on capital (ROC) if managed at 50% of total potential profit.

Traders who believe technology is due to fall further may lean towards a short call spread. This 2-point wide call spread combines the sale of the 161 call and purchase of the 163 call in April, requiring $132 in capital and also would yield a hypothetical 25% ROC if managed at 50%.

This iron condor relies on the technology ETF staying between 141 and 165 by April expiration, putting up $122 to make a potential $78 max profit.

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