Volatility is Back

After a long lull, we finally have volatility back in play.  After what was a much bigger than expected rally (I sold a bit early yesterday during regular trading hours), we now have a fairly big gap down awaiting.  Usually when that is the case, bonds are strong, but they are basically flat from yesterday's close.  This is actually a bit like May 2015, when higher bond yields were looked as a negative, and the stock market weakened when bonds sold off.  This looks like a similar scenario, where bonds are leading stocks, and not the other way around.

What yesterday's strong rally showed you was the eagerness of those who were left in the dust, underexposed to equities looking to get back to normal stock exposure levels.  Also you saw a lot of weak shorts who covered when they were getting run over intraday.  There is not much conviction on the short side, but there seems to be a "what, me worry" attitude on the long side.  That is worrisome for the dip buyer, so I will be more cautious when the next dip comes, probably willing to wait longer than usual.

A dovish Fed member yesterday afternoon gave a bump higher, but doesn't have much staying power these days as yields creep higher.  We should chop back and forth between yesterday's low and high till the Fed meeting.  I am not really interested in putting on much size here, because the conviction is not that high yet.  But I do think shorts at the top of the range are safer than longs at the bottom of the range.

There will be expectations that the Fed will do nothing and that is the right call, as all signs point to Yellen taking the easy road and kicking the can another 3 months till after the election.

Waiting patiently for either the bears or the bulls to overplay their hand.