Daily Market Brief

Bombs Away

BombsWhat a mess. Markets went from all time highs to full crisis mode within 3 weeks. Europe, Ebola, earnings, rates, oil, end of QE, you name it, every bomb you can think of is being thrown at this market and volume is racing higher. The $VIX spike is signaling outright panic. Ironically of course I had been calling for the correction for months and now that it is upon us I’m not short. Yet as the 50 handle ripper from the lows yesterday showed it can be brutally dangerous to be short as well.

Markets are all over the map and are down hard again this morning. $NFLX, $EBAY, $WMT all came out with crummy growth pictures and got hammered. Duh. Europe is back to recession angst. Yes it was all a mirage and central bankers have been misfiring.

But I maintain this is a time to buy and not to short. But it’s not an environment for the squeamish. My favorite vehicle right now is shorting volatility. Why? Because it will die down and die down hard. A fed meeting is coming this month and quite a bit of POMO next week, $GOOG and $GS are reporting as well today and things will not seem quite so gloomy after things have settled.

This does not mean prices can’t go lower, but volatility will subside unless the entire world will crash. I see no evidence of this. I see a 10% correction we’ve all been longing for and so have money managers. It’s the classic head game: Oh how I wish I could get a 10% correction to buy, then it happens and everyone is scared to buy.

The #DAX is almost down 20% from the highs in almost a straight line as well. Yesterday was the biggest volume day of the year and those lows were being bought.

The charts make it very clear that this move has been an earthquake of quite historic proportion. Not so much in the size of the move but the speed and depth.

I present to you the weekly $DJIA. It has been years since we have seen such a deep pierce below the weekly Bollinger band:

INDU weekly

The closest we can see here is the 2011 correction and clearly all of these events were buying opportunities. Now don’t get me wrong this is a massive move and extremely difficult to trade and keep your wits about, but this doesn’t change the larger message. My focus is squarely on where we are going and not where we are today.

Where we are today is still vastly disconnected from all basic MAs. The $NDX has been crushed, just look at the RSI:


But here’s the most fascination insight. As most of you probably recall I have been drawing a 2007 analogy in regards to the monthly $VXO chart. The structure called for a retrace of this initial wild volatility spike followed by new equity highs:

VXO monthly

Now look at the weekly $SPX chart:

SPX 5 year

A very similar and very rare deep spike below the weekly Bollinger band coming off of record highs. Cute. Now what’s the structural reason for this? In my mind it is years of excess that needs to be wrought out of the system. We just did this and created a massive disconnect. In 2007 this event caused a massive bounce back into new highs. Here’s the weekly chart of what happened back then:


The initial path was to get back inside the weekly Bollinger band and reconnect with the weekly 5EMA and 8MA and ultimately the middle weekly Bollinger band. Whether we jump to new highs or not in my mind we will see a similar reconnect effort over the next few weeks.

For this week the primary goal for bulls will be to save the weekly trend line and save the weekly 50MA of 1887:

SPX weekly

It would have seemed a lot easier last night as futures are now totally smacked again by European angst. For now we have higher lows and oversold stats continue to abound:


What a move though in the $ES and these trend lines have relevance:


We have trend line and April low support. Would I have preferred a strong follow through today with a gap up? Yes, but with this mornings renewed mess I can buy back $VXX puts and use the $VIX as my guide here and look for positive divergences:


I do have to keep an eye on further downside risk as well and the monthly $OEX chart also makes clear we have some more downside risk into the middle Bollinger band. In 2007 we didn’t quite get there at first and I suspect this is the scenario we are currently playing out:


Trade plan: I’m taking some hits this week on some options positions and am underwater in futures positions, but have also locked in a bunch of gains and generated cash by closing various positions. Trading is as erratic as I’ve seen it in years and we are in a very stressful time in the market. My strategy will continue to focus on selling volatility and select option plays.

Best case here, we either have seen the Q4 low or are about to make it and will see a massive oversold rally into next week (my premise), or worst case central bankers are completely losing grip here and the world plunges into a major crash. I seriously doubt that this will be the case here. We’ve already plunged 200 points on the $ES and Janet and her team will not let over $4 trillion in QE go to waste without a fight first. And that is what shorts have to be super careful of.

So for now I view yesterday as a major earthquake and today’s overnight action as a major aftershock. More will come, but things will calm down and hence I’m selling volatility.



This site uses Akismet to reduce spam. Learn how your comment data is processed.