Back in my younger days, in La Jolla and then later in Hawaii, I was completely obsessed with surfing -- just as I'm now obsessed with the markets. I used to study the charts, wind patterns, and buoy reports from the NOAA as obsessively as I now study the charts and patterns on the VIX and SPX.
One thing we knew as surfers was that an extended, boring "flat spell" was eventually going to be followed by some "killer waves". A side benefit of a flat spell was the sand and the reef bottoms had a chance to calm down, setting up some perfect waves when the swells actually started to hit.
Now that the markets have endured their own version of a flat spell over the summer, the immediate forecast calls for some "killer waves" to be hitting soon. The financial atmosphere is stirring as volume comes surging back into the markets, so we need to get ready for some exciting big wave action over the coming months.
With big financial waves come bigger risks -- and bigger thrills. It's a time for discipline, and also courage. The best trades are going to be the toughest ones to "paddle into", but if you can paddle into a monster market trend while everybody else is trapped inside, then you'll pull out great profits at their expense. At some point soon, the vast bullish majority is going to be caught inside by a tidal wave of selling, and a lucky few are going to be surfing that tidal wave to monstrous profits.
This weekly chart of the VIX is a graphic representation of the summer flat spell. All those red candles hugging the low end of the range are a precursor to a coming period where the VIX will rise, and intraday point swings will expand. Since the VIX and volatility oscillate up and down in a semi-predictable sine wave pattern, we can confidently expect a rising VIX to show up, literally, any day now. Volatility is set to come back into the market in a big way.
The VIX rose yesterday, on a slight up day for prices. Interestingly, call volume vastly out-paced put volume intraday, as I was tracking this closely. People were jumping all over calls, to the point where the market makers could actually raise the price into this demand. Usually they only get to do this on demand for puts. The bullishness is getting particularly frothy here.
It's not too surprising. With the upside breakout out of the trading range, everybody and their brother -- and their Aunt Edna, and the taxi driver taking you to the airport -- is bullish. Hopefully the SPX can now blow all the way up to 1040, as that will be a great, great place to do a heavy-duty short position. We'll definitely want to paddle into that wave. I will advocate going heavily short on a move up to 1040 to 1050 -- about as aggressive as you can be within reason -- with a tight stop just above there. That would be a great low risk/high reward trade. We'll see if we get that chance.
It's more likely the market will now pullback, and with surprising force too. Once all the bears have been stopped out -- prudently, I might add -- the market is in a position to then smack everybody around, bulls and bears alike.
So if you took my advice and went long the SPY yesterday as a hedge and got stopped out of the Tempest Fund, then look to hold the SPY for a move to the 1040 range -- where we'll try to pinpoint a spot to reverse to a short position.
If you're still holding the SPY and the Tempest Fund -- as it was hovering right around our decision levels into the close yesterday -- then just sit tight. There's a strong chance that we'll see a quick pullback here, making this a "false breakout". There's just too much bullishness, and such a market can collapse at any time. If this turns out to be the case, sell the SPY long hedge on a move below 1019, and hold onto the Tempest, and we'll take that off at lower levels. (We're still stopped out, in my mind, but only looking to manage it from here as best as possible.)
I'll update those holding just the SPY long if any action is needed on that, as we don't want to turn that hedge into a losing trade.
But the big waves are coming. We want to put ourselves into a position to paddle into some big set waves as they come rolling in. There should at last be some great opportunities to profit from the market as volatility returns over the next few weeks -- but the key will be staying flexible.
Sentiment Dashboard
by Adam Oliensis
SENTIMENT TANK: Filled 2 points to 13% full of negative sentiment. SHORT-TERM: Moved into neutral with a negative bias.
MID-TERM: Progressed 2 points in its decline phase window of opportunity to 30% on the bearish side but with Confidence remaining at a bullish 1 (out of 7).
LONG-TERM: Regressed a point to 93% on the advance side. Confidence remained at a bullish 1. (The weekly gauge can regress day-to-day. We quantify whether it's advancing or declining based on its week/week reading. By contrast, if the mid-term raw score starts moving UP on a daily basis the gauge flips to an advance phase.)
BOTTOM LINE: The market continues to move higher as the sentiment tank fills up (though not much). It's not quite a "wall" of worry...maybe more of a "dressing screen" of worry. Nonetheless I think we have to regard the market's ability to move higher as the tank fills as bullish unless/until we get a real sell signal.
Se não receio o erro é porque estou sempre pronto a corrigi-lo
There's no bull side and no bear side. JUST THE RIGHT SIDE!
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