Looking at past historical data for S&P futures, the times when you have two straight gap downs of over 1% followed by a gap up of over 1%, you see a list of time periods populated by bear markets. In particular, many of these instances occurred in 2008, 2009, and 2011. This market has totally changed regimes from a benign aging bull market to a market entering a transition from up market to down market. This is no ordinary pullback, like you had in 2012, 2013, and earlier this year. I don't remember any of those corrections with this kind of intraday volatility. The VIX proves that point, as we haven't seen these kind of VIX readings since 2011. We never got over a 22 on the VIX since the beginning of 2013. Even during the taper tantrum in June 2013, VIX could only get up to a 22, and that was a spike reading. We spiked above 30 on the VIX this time around.
Something is quite different about this pullback. I was shocked to find out that the AAII sentiment readings showed more bulls than last week even though the market has plummeted over that time period. It seems retail investors view this as a buying opportunity. I keep seeing that in the Twitter streams. The market has done its job of fooling the majority most of the time. It went much higher than anyone expected, and kept teasing bears with quick pullbacks, which only led to quick rebounds. US equities have gotten so high that even a dip of 8 percent leaves the market overvalued, but looking like a bargain to the retail investor.
How is it that when the market first reached 1880, it was considered overextended earlier this year, but now that the market went over 2000, and pulled back to 1880, it is considered a bargain. Over those 6 months, there has been no earnings growth.
This market feels like a 2007 and 2011 mixed together. 2007 in that it is an overvalued aging bull market that is several years old. 2011 in that we're seeing a huge drop in bond yields along with the end of QE. I have a hard time picturing this pullback resolving itself by going straight up in V like fashion like you saw in 2013 and earlier this year. I see more of a mild version of a 2011 scenario, where you get choppy trading in a range, for several weeks.
The basic game plan is to sell the rips for the rest of the month. Range should be around SPX 1800 to 1890. We are getting close to the top of the range here. We may have a bit more upside but I wouldn't try to play long for those last 10 points.
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6 comments:
I actually almost completely agree with you. But I am trying guess what others are thinking:
If Fed's verbal support yesterday is seen as the floor for equity, then market will probably rise up till the coming FOMC.
Your thoughts? Thx
Fed verbal support only matters if Yellen says she's willing to do QE. The others don't matter.
The Fed probably don't want to pull out the QE card again until we see more bad economic data. Just the market going down isn't enough yet.
Do you have view on EURUSD? I think this is the only macro trade that is still trending right now.
I have no view on EURUSD. I believe the FX market is one of the most difficult markets to predict in the world. Huge advantage for the insiders who have sources at central banks.
I have to agree - this selloff is not just a dip. I did buy into it though, but only for a trade (sold the close today). Stuff got oversold on weekly basis rather quickly (especially energy and semis) so the upside pop was a straightforward odds play.
From here it gets dicey. We've got $RUT in a weekly downtrend, crude staying below 90, $CRB still going lower and 10-year yields way down. This was a perfect technical bounce, and, with $VIX down 50% in three days, the odds favor resumed downside. Also, agree on intraday vol - when things were melting down, price action was downright jump-out-the-window brutal, just like in '08.
Welcome to the "be quick or be dead" market.
Great blog, BTW, please keep it up.
Cheers,
/Wulfrede
The hedge funds are herd animals. They sold heavily last week, and now that the market is rebounding, they need to keep up with the averages and are buying heavily this week. Same V shaped rally that we've seen over the last 2 years. But I don't think we'll be able to go straight up to new all time highs so easily this time. Mainly because of the severity of the dip, and the already high stock allocations among asset managers.
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