Volatility is Off the Hook

You are getting some wide intraday ranges in the SPX that is causing systematic selling, namely vol targeting funds and CTAs.  Also you have the news-based sellers that got nervous after some hawkish talk from Powell, and of course omicron headlines.  When was the last time you saw a puny headline from a CEO talking about Covid causing a huge plunge in afterhours?  That's what you call fragility.  After a bounce on Monday, the market was vulnerable to another down move, and any tiny headline was like lighting a match to a gasoline covered haystack.  

The end of month selling has been vicious during risk-off settings, as the September 30 and November 30 selloffs show.  In some of those month ends, there is a big JP Morgan fund that puts on an SPX collar (buying an out of money put spread and selling an equal dollar amount of calls), but in others, it seems like window dressing and position squaring due to balance sheet constraints.  Whenever you have price insensitive sellers in a risk-off environment, they can cause short term market plunges, as you saw after Powell officially retired his pet, the word "transitory".  

The best thing the bulls had going for it, a very strong up move in bonds during this selloff, due to a Fed that was quick to get nervous and turn dovish at a moment's notice, was quashed by Powell's focus on inflation.  His job is safe for another 4 years, so he's more willing to throw cold water on the bull's hopes, if it means maintaining some credibility on inflation and not being seen as a complete dovish pansy.  Plus, it seems like the politicians are feeling a little heat on inflation, and are willing to sacrifice a few hundred SPX points as long as it keeps inflation expectations somewhat in check, and keeps commodities prices down.  

You can play for the bounces, like buying in the hole after the big intraday plunge yesterday, but you need good entries to make the risk/reward compelling.  You also have to lower your price targets and holding times.  This isn't your raging bull BTFD market anymore.  We are entering the transition phase from mature bull to old bull.  Its a bit more treacherous to go in there and buy in the hole.  

In the short term, it doesn't look like this market is close to being done on the downside.  I would use today's strength to sell, in order to have the dry powder to buy on the next dip, which probably happens either Thursday or Friday.  With the market nervous about a faster taper and omicron, I don't see a sustainable bounce until you see more blood letting and risk reduction. It probably takes another week or so before it will be safe to hold for longer term swing longs.  

Big picture, we are now entering the transition phase where volatility rises and the market is choppier, so its now actually worth it to consider shorting SPX.  But also still a good market for dip buying.  So an ideal market for traders, but not a good market for investors that have a weak stomach.  

Technical support area is the September top zone, around 4525-4550.  Market abhors a vacuum, and there is an air pocket of very little trading between 4500 and 4550.  It would not surprise me to see one or two more waves of selling to take us down to that area.  I expect that area to hold due to year end dynamics which favor bulls in the last 2 weeks of the year.