Monday, May 2, 2016

Higher Volatility

With many of the markets closed today due to May Day holidays, we are quiet.  But expect more days like Friday when you had a somewhat scary moment intraday, as the put/call ratios soared, 1% down following 1% down move the previous day, something we haven't seen in several weeks.  We have reached near buyer saturation in the S&Ps.  It has already occurred in Hang Seng, Nikkei, Eurostoxx, and Nasdaq.  The only one that was remaining untouched was S&P until late last week.  Now the S&P has joined the down party, although just a bit.

It is a new ball game.  We had the warning signs as the steep VIX contango and failure to burst through strong 2100 SPX resistance the past 2 weeks setup the end of month dip.  Now we should see dip buyers coming in and trying to buy "cheap", but I don't see too many buying the rally.  The buyers have had plenty of time to buy during this complacent period after the Fed green light in mid March.  About 6 weeks to load up on stocks after that, and the signs of buyer saturation are finally showing up.  Finally.  This is the time you can profitably buy puts on any one day rally and sell them when you get the 3 day swoons.

It is looking a lot like December 2015 when you had 3 day dips that resulted in V bottoms, but this time, I don't expect us to spend so much time up here.  Too many negative catalysts coming up, Brexit (meaningless, but the financial media has to come up with something to drum up trading volume) and the election, with more Trump airtime.  

With my bearish view on equities, I am even more bullish bonds.  Old Reliable, the bond market, it can't stay down for long with the mess that is the global economy at this time.  The ECB and BOJ aren't going anywhere with their NIRP and endless QE, and all it takes is for the Fed to finally admit that they can't raise rates and will have to do more stimulus and you will see 10 year yield plummet to new all time lows easily breaking the 1.38% mark set in 2012.  That should happen in the 2nd half as the remaining optimists finally throw in the towel.

Shorting ES around 2080 and buying bonds around 1.85-1.90% yields are great risk/reward plays.

1 comment:

MM111 said...

2080 - Perfect short :)