Monday, April 9, 2018

Bloody Game

These daily moves have been vicious.  There is no such thing as hanging out in the middle of the range.  Its either straight up or straight down.  The VIX is not correctly pricing in the amount of movement that this market is currently exhibiting.  Sure, the VIX is pricing 1 month forward vol, but usually implied vol trades at a premium to historical vol. 

This market is really testing the limits of how long a U bottom lasts.  Usually at the most, these U bottoms last 2 weeks.  It has been over 2 weeks since we first hit that panicky low under 2600 on March 23.  If this were to follow past bottoming patterns, it should have already been rallying.  Instead, the SPX is stuck in a 2560-2680 range for the past 2 weeks. Granted, that is a huge range, for just 2 weeks, but the moves have been huge on a day to day basis.  Usually that kind of volatility is a sign of a market bottom, and the elevated put/call ratios and bad news flow is usually what happens at a bottom, yet this thing refuses to go up and stay up. 

Perhaps it is the constant news flow that is making the bottoming process so lengthy.  I don't think its profitable to rationalize moves in the market with news.  Price is truth.  And clearly this cruise ship is crowded with retail customers bogging it down and making it hard for the trend to turnaround. 

I am still in the bullish camp, but losing a little bit of conviction with each passing day.  The longer this market tries to bottom in this 2560-2680 range, the more likely that it breaks this range to the downside rather than the upside. 

If there was no trade war fears and the market was trading like this with no headlines, I would be extremely worried being long.  As it is, the trade war hype reduces the meaning of Friday's weakness.  My first read and current read of the market is that we are in a choppy U bottom that will resolve to the upside, very soon, but if I had 75% confidence last week on that prediction, it is down to about 60% confidence now. 

Big picture, this is a topping process that will require a different approach than 2016 o r 2017.  It is trading like 2000, to be honest.  But that would be too scary to contemplate for longs if they remember how nasty that 2000-2002 bear market was.  I don't think it will be that bad, but it could very well be half as bad.  In that case, instead of 50% downside, you are looking at 25% downside, which would be still be  around 2150 from a 2870 top.  That is a big move down from here.  Keep that in mind when the market is trading more positively and it becomes reasonable to start playing the short side.  Gut feeling is that there will be some nasty down moves in the second half of this year as mid term election season nears. 

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