The market continues to hold together, in spite of the odds. There's just no fear anymore, and volatility remains very, very cheap. Volatility is measured in the options market by the VIX and VXO, and these two continue to plumb new depths -- showing a complete lack of fear that volatility is going to come roaring back into the market.
Way back when, as I was furiously experimenting with methods for position trading, I noticed a simple thing. If you go long when the VIX is high, and reverse the long and go short when the VIX is low (on a relative basis to recent history), you can almost always make money or at least break even. Even in a bubble bull market like the 90's. (This involves the anti-persistence of market volatility, which is a "heavier" discussion that I've touched on in the past; we can save that for another day right now.)
It's having patience that makes this strategy so difficult to pull off, and that's why I ultimately rejected that simple long/short methodology. During rare periods you have to sit through months at a time -- like this current period -- where the VIX (and now VXO) go low and just stubbornly stay low. If you don't truly understand the odds -- as most people would not -- then these months can become agonizing, even though there's ultimately not that much risk.
There is always a downside when you play the odds and elect to take on risk. No outcome is certain, but some outcomes are much more likely than others. And the fact is when the VIX is at the bottom of its 52-week range, as it is now, the odds favor a sharp move to the downside on the S&P 500.
Yet it's not happening. There's no selling pressure. At this point, I'm inclined to believe that there will be no major selling pressure until a catalyzing event comes along to galvanize the opinion of money managers that they need to take action to "protect their year." Since most managers are benchmarked according to relative performance -- and not absolute performance, as obviously it should be -- there is a huge impetus for them to mirror the results of the S&P 500.
So most mutual funds end up as closet index funds, closely mirroring whatever their benchmark is, with a handful of high-beta stock picks in there to try to outperform. Why do you think there is all that incredible volume in the QQQ's and SPY's? That is mutual fund money quickly and easily "benchmarking" their portfolios.
This has now translated into a giant game of musical chairs in the current market. Nobody running a large pool of money wants to anticipate the music stopping before it actually does. So most of the shares held long now are just sitting there, held away from the trading action, waiting for some reason to finally take profits.
In the meantime, the "smart money" contrarians -- who were feasting for so long during the bear market -- keep trying to play the odds that this humongous group of long-side bets is going to have to surrender, and there won't be room for them to exit gracefully at that time -- which is undoubtedly true. But the soft, easy-listening music of the market keeps inching prices higher, and these quick-money bearish bets keep getting worked off to the upside.
There won't be a major sell-off until the big pools of institutional money are forced back into the market to liquidate. We'll see evidence of that when the VIX and VXO gap up, forming a big daily white candle (meaning the close is higher than the open on the VIX). This will be accompanied by a big red candle on price in the S&P 500, on a major sell-off. That should be the start of a major correction.
Until we see such a configuration, I'm not inclined to do much on the short side, other than quick and opportunistic options positions based on my fractal dimension indicator.
While my down fractal still has a good chance of forming right now -- it's done "nothing wrong" yet -- more energy needs to appear soon for that downside scenario to be correct. Yesterday the market looked headed for a bad close, but was rescued with a sizeable rally at the end of the day. So far, it's only a weak, drifty down move, which really means the market is still in its upside "steady state."
Again, my methods are not about going hog-wild long when the VIX is hitting momentum lows over the last multi-year period. History shows this is a disaster waiting to happen -- in bull or bear markets. But if the market can go over 1060 and stay above it, nimble bets to the upside can be made, if and only if you are willing to stop-and-reverse that long trade into a short trade on a move back down through 1060. You can join in the bubble, I guess, if you are fully cognizant of the risks!
If a bigger down move is in the works without re-visiting this 1060 level, then we'll try to recognize when the big pools of money are starting to scramble to lock in profits, as that could start a major ripple effect that will last for weeks, and proliferate in a decidedly chaotic manner.
Sentiment Dashboard
by Adam Oliensis
SENTIMENT TANK: Filled a point to 2% full of negative sentiment.
SHORT-TERM: Drifted from Neutral to Neutral with a Decline bias.
MID-TERM: Neutral at 92/8 with slightly bullish Confidence at a bullish 2 (out of possible 7).
LONG-TERM: Neutral at 95/5, also with Confidence at a bullish 2.
BOTTOM LINE: Early on Wednesday it looked like we'd get our fear spike. But late in the day the market roared back and all that happened is that we moved into a neutral condition on the sentiment picture. After Hours positive news out of Cisco (CSCO) had the NDX futures rollicking higher, with the December SPX futures sitting right at the October highs near 1054. The underlying news is continuing to come in positive, which prevents the fear spike from getting any traction. And that's bullish for the market. If all the good news can hold the SPX up to over 1054, then we'd continue to anticipate a grind higher to 1070. But if 1054 can't hold the market's weight then we'll look for our fear spike and further downside testing.
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!
#forex4u - chat forex MIRC
O Clubeinvest.com informa que nenhuma da informação
aqui facultada deverá ser entendida como conselho ou recomendação
de qualquer tipo de transacção ou investimento.
