Daily Market Brief

December Pullback?

NTMarket update: After 8 weeks straight up markets are overbought and very stretched. Excessive liquidity continues to be the primary factor in lifting asset prices. Fair enough, that’s the market reality we are in. December seasonality tends to be strong, yet I haven’t found any precedent where markets came into December that red hot.

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Bulls are giddy and who can blame them. Bears are virtually non-existent and either ignored or mocked and any evidence of froth denied or dismissed. Yet these are exactly the conditions that tend to produce pullbacks or even gnarly corrections. As QE continues to be a reality and the FOMC is showing 0 signs of tapering anytime soon we can only assume the bid will continue until something changes. Yet I am seeing nervousness in some of the action that leads me to believe we may see a quick pull back in the first and possibly second week of December.

VIXNamely the VIX shows structural signs  that a quick spike may be imminent. Fear has been predictably at a minimum and yet we are starting to see desire for protection to creep up similarly to what we have seen twice in the past year following extended periods of calm. As we have seen, however, protection is unpopular until it isn’t. The cleanest trade strategy in VIX has been to short it on extreme spikes above the 200 weekly MA. Tougher to time are trades to the upside, but the set-up for a quick move to the at least 16 area looks solid from a R/R perspective. I’ve entered some $VIX $14 calls for December. As $VIX has stabilized I see downside contained if I am wrong. However these calls could easily go 2-5x on a quick spike so I like the R/R here.

SPXIf a pullback does indeed occur the most likely target for the $SPX in my view is the weekly 21 MA as it has been a magnet for the most recent mini corrections. Another supporting factor for the market is a very heavily compressed POMO schedule which includes a record $7.5B whopper on December 19. Unknowable for now is the impact of renewed fiscal and debt discussions coming up in January. Prudent managers may want to lock in some profits ahead of the renewed political circus.

Good luck trading!


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