Extreme Volatility

Wow, another massive dump into the close yesterday.  They don't make anyone feel good when searching for a bottom.  There have been some savage moves in the afternoons during this selloff.  Seems like no one wants to hold overnight after a nasty close.  When the market is derisking and fear is prevalent, you get these kind of moves at the close.  When it gets this wild, without having broken the prior lows in February, and still above the 200 day moving average, it is a sign that the market has gotten too oversold and is due for a bounce.  It is hard to pick the bottom price, but it is easier to pick the bottom period.  This action feels like its within 48 hours of a bottom.  That is based on historical price action.

I have noticed that the VIX is not really reacting much to the volatile moves.  You would expect the VIX to be at least high 20s, or low 30s, but it closed at 22.5.  The VIX seems underpriced.  That is rare, but when you are getting 2% moves on a daily basis, the VIX should be priced at 32, not 23.  Perhaps everyone is already well hedged and the demand for put options is just not that high.  Or it could be market makers are selling volatility at these levels, expecting lower vol in the coming weeks. 

Usually the VIX traders foreshadow the SPX traders, so if they are feeling as if volatility will go down, that is a clue as to what SPX is likely to do in the near future. 

One positive sign for this market is that bonds are finally providing portfolio protection when stocks go down.  The 10 year yield broke the 2.80% support level and is current trading 2.76% as I write in overnight hours.  That is a positive considering the worries about risk parity de-risking.  Also, you have fund managers liquidating theirfavorite names, the Facebooks, Amazons, Googles.  That is usually during the final stages of a selloff. 

This is definitely a painful purging for the longs, and long term, a sign that this bull market is forming a big top.  But in the short term, expecting a strong countertrend rally as the topping should be a process that takes many months.  SPX 2580 is a strong support level and for those holding cash, would be a good risk reward level to buy.  I expect support there to hold, but ahead of Good Friday and the long weekend, the panic could get extreme today. 

For those already long, all they can do is just hang on and wait for the storm to pass.