Yesterday the Volatility Index (VIX) dropped like a stone, ending the day at 26.47. Monday's euphoric rally has traders feeling very confident about the upside prospects.
If you're bullish right here (for more than a trade, anyway) then you are betting on one thing, and one thing only. You're betting that the bear market is over. If it's not a new bull market, you've got a big problem.
I went back last night and checked, if you had gone short every time the VIX dropped down to 26 -- or moved up to 26 from below -- you would have made money. Every single time . There has never been a point in the bear market where you didn't make money by "fading" the bullishness reflected in a VIX reading in the mid-20s.
That's an eye-opener. So really, it only leaves the question: Is this time different?
I'll let you make up your own mind on that one. I don't think it is. We're seeing the exact same things we've seen at every other important decision point in the bear market.
I'm actually grateful that we're finally reaching a sentiment extreme. For the last few months, it's been a tough slog as the crowd has been evenly divided between bullishness and bearishness. It's been hard to get an edge.
But now, in one final rush, the crowd is running over to the bullish side of the ship, fighting for a spot on the railing to view first-hand the great new bull market ahead of us.
This gives us a chance to meander over to the now-empty other railing on the bearish side, where we can lean back, elbows propped, and wait for the bulls to slink back over. Initially they'll trickle over, one by one. But later, when the selling amplifies, there will be a mad rush back to the bearish side of the ship.
Then, when we're running out of elbow room, we can move over to the bullish side of the ship.
And so it goes in a bear market, over and over again. Some things never change.
As long as I've got this analogy going, I might as well use it to make a subtle point. Right now the market is still in a mode where it's creating more bullishness -- even though there are very few people left to convert. (Monday's lowest trading volume of the year confirms this idea.) There is still a general movement toward the bullish railing on the ship, as every last person fights for a spot. This process can last for quite a while, and the end-stage can go surprisingly far. There's even an outside shot that the S&P 500 (SPX) can get all the way to 920, and maybe, in an absolute euphoric rush, all the way to the neckline at SPX 950 (that's a real long shot.)
So even though staking out small bearish positions right now will undoubtedly pay off in a big way, it's better to wait around a little more before putting on a big position. We want to see concrete evidence that a spark of fear has hit the crowd. We'll know it when the VIX starts jumping up. A white daily candle on the VIX -- and ideally, the QQV too -- will be the trigger to load into leveraged bearish mutual funds at Rydex or ProFunds.
I recommend these funds because you get 2 to 1 leverage and you don't need a margin account to participate, meaning you can take advantage of down moves in an IRA. (Note: the $25,000 minimum only applies to accounts directly at Rydex -- most brokers will allow you to do much smaller Rydex positions.) But really, any bearish position will do once we get the signal to act.
So now we're on watch, just waiting for our cue. It could come today, or it could come next week, or even two weeks from now. It's impossible to say when the spark of fear will hit. All I can say is it's coming, so get yourself ready. We may be able to capture a whole year's worth of profit in just this one mid-term trade.
Sentiment Dashboard
by Adam Oliensis
SENTIMENT TANK: The tank drained by 7% down to 18% on Monday. This is the lowest level it has seen since January 16, '03 when the market was on its way down from its mid January high. (For those of you tracking the daily figures, the daily reading is normalized to the prior year so you may find some disparity in the numbers.)
SHORT-TERM: The hourly gauge remains in a mature uptrend.
MID-TERM: The mid-term gauge gained two points in its advance phase to 92%. The Confidence Diffusion Index gained 2 points to 2 (out of 7). A number of internals prevent us from having more confidence in the current advance phase, not the least among which is the extremely low reading on the tank. (Bearish VIX divergence and the proximity of overhead resistance on the SPX in the low 900s figure in as well.)
LONG-TERM: The weekly gauge advanced 2 points to 56%. Our weekly CDI progressed to 3 (out of 7), indicating underlying strength that could well be sustainable if the market works off some of the mid-term frothiness that's now developing.
BOTTOM LINE: We could be approaching a heady and euphoric top. As I wrote in last night's Closing Bell the market is getting toward the point where it's running on fumes. It's not quite there yet, though, so there could be an extension on this rally that runs it up toward SPX in the mid 900s, but that would almost certainly be a point of complete exhaustion. Likely the mid-term top is much nearer at hand.
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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