Monday’s sell-off brought mixed results for US equity indices as the tech-associated Nasdaq Composite NASD and Nasdaq-100 NDX were both down roughly 3%, while the Dow Jones Industrial Average .DJIA and S&P 500 Equal Weight Index SPXEWI were up 65 basis points and basically flat. Including Friday’s action, the only US Equity index that is positive during the past two trading days is the Dow at up 33 basis points.

Intriguingly enough, though most equity indices have been negative the past two trading days, the NYSE High Low Index ^NYSEHILO has increased 14.5% from 57.1 to 71.6 on the indicator’s chart. For those not familiar with the indicator, the High Low Index measures the percent of stocks making 52-week highs relative to those making 52-week highs and lows. In short, when the indicator is increasing, more stocks are making 52-week highs versus stocks making 52-week lows.

Considering most US equity indices have been negative the past two trading days, the two-day increase within the NYSEHILO indicator ranks within the 99^th percentile of two-day increases going back early 1980. Individually, Friday’s increase ranks within the 99^th percentile of one-day increases, while Monday’s fell just outside the 99^th percentile. While initially counterintuitive to think about an indicator measuring 52-week highs increase amid most indices moving lower, digging deeper reveals a silver lining. Much of the past two day’s negative action has been focused on mega and the larger, large cap stocks, and the increase in stock’s making 52-week highs is a near-term sign of improving breadth. This is somewhat confirmed by the S&P 500 Equal Weight Index SPXEWI outperforming the S&P 500 SPX by more than 1.5%; though it is worth bearing in mind that index performance hasn’t been stellar, while some individual stocks have been capable of rally to new highs.

Considering there are names that made new highs (either 52-week or all-time), the 52-week Highs/Lows report within the Database Reports in the Security Screener (Securities > Security Screener > Database Reports) was utilized to create a Watchlist of those stocks just making 52-week (or all-time) highs. After creating the Watchlist, the Stock’s Screener was used to filter this Watchlist for high technical attribute S&P 500 stocks, of which there were 19. The list of stocks is shown below. Bear in mind, most of these stocks have yet to report earnings, so be cognizant of upcoming report dates before considering exposure.

Among the notable highlights is Walmart WMT, which broke a double top at $97 to mark an all-time chart high and count as a fourth consecutive buy signal since early 2024. WMT is a 5 for 5’er that ranks within the top quartile of the Retailing sector matrix and top quintile of the Top 500 Large Cap (Total Return) matrix. Earnings are expected for Walmart later within the reporting cycle, so it is among those that can be considered here on the breakout or on a pullback toward the middle of the 10-week trading band at $92.

With most of the stocks within the list trading at highs, advisors should be aware of the positioning on the 10-week trading band and whether the stock may be overbought enough that exposure is better added on a pullback. Generally, a stock with a weekly overbought reading north of 70% and trading above support would fit this criterion; Boston Scientific BSX would be an example of such. As noted, be cognizant of upcoming earnings dates within names that may appear actionable here. Investors are often best served to wait until post earnings before adding exposure, and one such example is Broadridge Financial Solutions BR, which has earnings on 1/31.

One of the largest developments in the ETF space over the last few years has been the buffered or defined outcome ETF (we will use these terms interchangeably). There are so many different varieties nowadays, but the general idea is protection against some level of decline at the expense of reduced or capped upside potential. Most of these buffered ETFs are built around US equity indices but they have branched out to commodities like gold. The space is growing rapidly with over $45 billion in assets linked to buffered ETFs (ETF.com). They're a good story, as you can participate in the equity market while ensuring that the investment is protected against some level of downside while lowering upside participation. For clients with capital preservation at or near the top of their list of priorities, these buffered ETFs seem like a viable option so they can still participate in equities. However, as the saying goes, “There’s no such thing as a free lunch.”

 Long-term capping of the upside for downside protection is a good way to underperform the market by a substantial margin, and that’s not including the average 78 bps fee for a buffered ETF. In a simple study, returns were compared for holding the S&P 500 Index (SPX), holding Money Market (MNYMKT), holding a 50/50 split between SPX and MNYMKT, and a hypothetical SPX buffered ETF with downside limited to -10% and upside capped at 10%. For the hypothetical buffered ETF portfolio, there was assumed to be no fee and the ability to buy this collar at no cost at the end of each year. As mentioned earlier, buffered ETFs come in a wide variety of upside caps, downside caps, or buffer zones, however, this hypothetical collar strategy would be nearly an ideal scenario in comparison.

With a backtest starting in 1990, the hypothetical buffered strategy had a cumulative return of 340% versus the S&P 500’s return of 1,564%. It’s no surprise that the S&P 500 put together better performance, however, its worst annual performance was -38.49% while the hypothetical buffered portfolio’s worst year was -10%. So, maybe there is some benefit to a buffered ETF for conservative clients. On the other hand, the S&P 500 has only had five calendar years with a return worse than -10% while 19 calendar years of greater than 10% return. So, the downside buffer only had an impact five times while the upside buffer reduced yearly returns 19 times in 34 years, or over half of the time. Sitting in money market for the entire period has a cumulative return of 149%, which underperforms the hypothetical buffer strategy but offers no years of negative return. The final strategy, a 50/50 split between the S&P 500 and MNYMKT returned a total of 641%, which bests the buffered strategy by a notable margin. At the same time, the 50/50 portfolio only had two years when the return was worse than -10% (one of which was a -10.89% return) while returning more than 10% annually 14 times. While its worst year was -18.58%, the 50/50 portfolio would have been a better way of giving conservative clients exposure to equities while reducing their risk exposure.

Many buffered ETFs come with monthly versions so investors can get the expected cap whenever they can put money to work, which would change the exact returns outlined above. In our hypothetical portfolio, it is assumed that the cap and downside protection are reset at the beginning of each year, however, this should not change the takeaway that buffered ETFs severely limit performance the longer they are used. One of the big selling points for buffered ETFs is that they are built around the average yearly return for the market, so investors can still participate in average market returns. While the S&P 500 has had an average annual return of 9.84% going back to 1990, the S&P 500 only had seven years in which the annual return was between 4.84% and 14.84%. Said plainly, the average annual return for the S&P 500 rarely happens in a calendar year. For clients that want to be conservative and limit downside while investing in equities, using traditional short-duration or money market instruments while holding a position in uncapped equities would be preferable to using most buffered products even if they offered zero fees, highlighted by the 50/50 strategy compared to the hypothetical buffer strategy. While some buffered ETFs could be useful for clients, make sure to know the risk and reward of doing so. As the saying goes, “There is no free lunch.”

Daily Option Ideas for January 28, 2025