Friday, January 2, 2015

Throw out the 2013-2014 Playbook

The 2013-2014 playbook can be thrown in the trash can right now.  This is a new market.  We are seeing another day of bad price action on no news.  VIX is trading at 19 on a Friday despite the market being down just 0.5%.  This is no 2013 or 2014 market, where all V bottoms presented a pullback-free, smooth ride higher for at least a month to new all time highs.  We just made a monster V bottom 2 weeks ago and the bears are already chomping away at the rally, and taking out big chunks in just a couple of days.

Normally, you have strong seasonality as the new month begins but this market seems a bit saturated to me.  The mantra of equities as being the best investment, especially US equities is now taken as fact.  The valuations are stretched.  The price action is getting more bearish, but not so bearish where you can feel comfortable shorting.  This market still favors the bulls, but it is not so lopsided anymore.  The bears are winning more than before.  Instead of batting .180, they are now batting .240.  Still bad, but not a complete joke.  This market is clearly transitioning from the bull thrust phase over the past 2 years into the choppier, and more volatile topping out phase.

The market always does a great job of behaving one way until most traders get used to that pattern, and behavior, and then suddenly behaving a different way to catch traders off guard as the fundamentals change.

You cannot play this market like 2013 or 2014.  You have to adopt a different strategy to successfully trade the new market.  I already got bitten by trying to buy this dip today and it would have likely worked were we in a 2013 or 2014 market, but we're not.  2015 is a different beast.  I will have to do some deep thinking to come up with a good strategy to trade this new thing.  It will catch a lot of the users of the old playbook off guard.  I think you will see more 2-3 day pullbacks on no news.  Need to stay on your toes in 2015.  There won't be many days to relax like in the past 2 years.


Anonymous said...

Short rips instead of buy dips. Problem solved.

Market Owl said...

As I said, the problem with shorting is that the bulls still have the upper hand IMO. It is going to be treacherous out there. perhaps by second half of year, the bear side will be more favorable.

Anonymous said...

How much longer do you think the dollar has before it backs off? Eyeing FXE for a dip buy.

Market Owl said...

i actually prefer buying yen over buying the euro. i am thinking March or April for a top in the dollar.

Market Owl said...

I would guess that the dollar will top out on a good news for the dollar story as ECB launches QE. I expect that to happen at their March meeting. It seems like January will be too early for Draghi to build consensus, and probably don't want to launch QE ahead of Greek elections.