Growing Optimism

 The past week, as the SPX went from 3300 to almost 3500 now over the span of 6 trading days (3300 during European hours when Trump was diagnosed with Corona), was a classic fear to greed move off a V bottom, but at twice normal speeds.  When the players in the money game have seen the pattern so many times (V bottom), they don't waste time putting money to work and pile in as soon as they can.  They know that there are no dips during these V bottom setups, so 1) they don't have to worry about much drawdown from entering near local tops, and 2) the sooner they buy, the better the prices they will be buying at to catch most of the move.  

Thus, when these patterns have repeated for so many years and with algos programmed to catch these V bottoms by aggressively buying after a V thrust like you saw from September 25 to September 30, there is too much eager money looking to buy for there to be any lasting dips during the uptrend phase.  And if there is a lasting dip, that makes the odds of a short term trend change all the more likely than in the past, when indexes traded with more choppiness.  

The question is when does the uptrend phase from September 24 to now, going on 12 trading days, run its course, and reverse to form a playable pullback.   In the past, you could be a little bit patient with trying to pick tops off these V bottom thrust moves, because the trend usually flattened out before it would reverse (see SPX chart for July 2019, September 2019 for 2 recent examples).  But the last 2 pullbacks off of a bottom thrust move (June 2020, Sept 2020) came right after a blowoff, parabolic top with no flattening of the uptrend before the reversal lower.  

The ideal short entry point would be to get in after confirmation that the uptrend is over, and before the sharp pullback lower, but in the last 2 cases, there was almost no time to get in after price confirmed that a pullback was underway, because the market fell off a cliff on June 11, and September 3.  So unless one was either already short, or is comfortable shorting into the hole, expecting a bigger hole, you missed those moves.  

You can only get better at the money game if you learn from past mistakes and try not to repeat them.  But also a recognition of what part of the cycle that we are in is a good guide to how far a pullback will go, how pessimistic the crowd will get before hitting the bottom, and how eager the crowd is to buy after the bottom.  

This part of the cycle, the late bull market phase, but less than a year after a traumatic drop in the market (March 2020), is usually a steady uptrend marked by quick, and brief pullbacks that don't get most of the crowd truly scared, and just a little bit nervous. That type of market gives short positions very little margin for error, and only a small window of capturing a profitable move lower, while giving longs a big margin for error, and a large window of profitability on trades.  

Its like the baseball hitter who has a flat swing through the strike zone, less likely to hit a home run, but more likely to make solid contact and hit line drives (going long), versus a hitter with an uppercut swing that doesn't stay in the strike zone as long, but has a higher probability of lifting the ball in the air and thus, hitting home runs, but more likely to miss and strike out (going short).  

Right now in this part of the cycle, going short is just a low probability trade, and the only reason I did go short was because I viewed the election as a backstop which would control the amount of upside this month.  But with Biden just crushing Trump in the polls, the market has sniffed out a Biden blowout along with a Congressional sweep for Democrats which is very likely to happen so obviously a lot of uncertainty is being priced out of the market, thus the lower vol and higher SPX prices.

I still think there is one last minute scare before the election to provide a graceful exit for underwater shorts but it probably will have to wait till after October opex coming this Friday. 

The price action is just too strong here to go all in, although if I didn't already have some shorts on, I would considering starting a short position today.  So I will wait to add, it is greed controlled market, so fear of missing out plays a bigger part in price movement than fear of losing.