Education
Now Reading
Market Fragility
82

Market Fragility

by The MoleApril 12, 2017

I feel rather conflicted about the price action over the past month and quite frankly that’s exactly how I should feel and thus act accordingly. Just take a look at a daily E-Mini chart and compare the March contract (ESH7) with the current front month (ESM7) and tell me what you see.

2017-04-12_spoos_update

What I see ahead of the March expiry is mostly orderly trending tape. After the roll over the characteristics of the price action changes completely and resembles a hastily spun roll of barbed wire (e.g. sporadic moves followed by long tailed sideways action).

Clearly we have entered a new market phase and as usual when facing a lack of information and/or uncertainty our human mind has a tendency to fill the void with ideas or worse – opinions. So first let me give you what I believe you will need to know to stay out of trouble and to retain your sanity with as minimal emotional stress as possible. Further below I will offer you a more philosophical perspective which may help your trading over the long term by preparing you emotionally for what is most likely to come. Of course as usual your mileage may vary vastly

Bottom Line:

There is nothing to do right here and right now, not until we are either trading near or below 2330 or near or above 2365. Near those extremes you can play the swings with some chump change but don’t let yourself get drawn into haphazard and potentially account ruining directional campaigns risking considerable amounts of your assets. We are obviously bouncing around in a whipsaw zone from hell with a long Easter weekend looming. That means a lot less participation and thus easy opportunity to smack you around a little.

There is downside risk but at the same time there is upside risk beyond the trading range I have highlighted above. Things could easily accelerate and produce a short or long squeeze before and after the Easter holidays. On the downside I don’t see any recent support levels that would soften the fall, which was the price to pay for months of blissful advances devoid of corrections. On the other hand on the upside we may quickly advance as well and produce a final exhaustion spike which may be reigned in post Eastern.

If you think that this may be great opportunity for a few small Hail Mary positions then you are absolutely right.But I caution you against getting over exposed and when in doubt play small position sizes or deploy a bullish or bearish spread to insulate you against theta and vega burn.

Market Fragility

The more long winded answer to what’s going on is a bit more philosophical and ties into what Nassim Taleb described in his book Antifragility. There are two concepts in particular I would like you to consider. One of course is that of fragility, which I believe is what we have created by basically suppressing, courtesy of quantitative easing, the occasional randomness and disorder inherent in all complex systems. Taleb makes the point that successful ‘antifragile’ systems actually benefit from an occasional shock. Resilient systems, as the ones perhaps envisioned by the Federal Reserve as well as various other 1st world central banks, on the other hand simply resist but do not learn or improve when encountering exogenous stressors or source of harm.

More specifically ask yourself what has happened over the better part of the last decade in our financial systems. Clearly the old rules barely apply anymore and the make up of market participants have large shifted from one dominated by human operators to efficient ultrafast algorithmic driven robotic systems. Those systems may operate extremely well within defined parameters but what happens when the floor gives away? Electronic circuits have no sense of right or wrong, no idea of what it means to serve the common good, or at least act in a fashion ensuring the preservation of the system as a whole. They will do what they are designed to do – pursue the path of maximum benefit at the expense of everyone else – as they are designed to do. Which once again works well within established and tested parameters but may utterly fail in a real world crash scenario.

What is worse is that the new generation of market participants (i.e. robots) may not understand when ‘enough is enough’ and that good old human paranoia may in the end actually serve to put a floor (i.e. prior historic technical context) where there now is none. A healthy market builds itself in a fashion that offers fail safes – such a market may suffer greatly during a market crash but at the same time it will benefit from ‘irrational’ human operators willing to step in where robots driven purely by algorithms may not. A ‘resilient’ systems as the one envisioned however apparently only responds to directional signals coming out of central banks, which incidentally at this point appear to have painted themselves into a corner.

2017-04-12_SKEW

So it seems that all that resiliency we have been embracing comes at a price. I talked about the SKEW yesterday and here’s a simple chart showing its slightly smoothed progression over the past decade. Now can you explain to me why its signal range has been steadily rising since the big crash of 2008? If we indeed have created a more rational a more stable and ‘resilient’ market then we should be seeing the obvious, right? But those spikes of fear just keep pushing higher and higher. Ask yourself why that is and what it says about the true fragility of our financial markets. My personal contention is that an occasional small doses of a poison makes an organism stronger, whereas a one time large dose can quickly kill it.

Lindy Effect

Another fascinating topic Taleb touches in his book is the ‘Lindy Effect’ which refers to a technology, or anything non-perishable, which increases in life expectancy with every day of its life. He gives the example of a book that has been a hundred years in print, and thus is likely to stay in print another hundred years (e.g. the bible, the Quran, the Torah, Das Kapital, Mein Kampf, etc.).

Now we have had almost a decade of quantitative easing and just like ‘temporary laws’ it seems that the longer its practice stays in place the more available it will be going forward. It does not matter if the Federal Reserve is currently preparing to tighten the screws a little. Imagine what may happen a week, a month, a year from now, if for any reason we see a 500 handle wipe out on the S&P 500. Ask yourself how rapidly central banks across the Western hemisphere would step in and deploy a healthy dose of QE in order to ‘soften the blow’. After all quantitative easing has worked so well in the past, hasn’t it? Always remember that to hammer every problem looks like a nail. Which incidentally tied directly into the Green Lumber Fallacy also described in his book but I don’t want to test your patience.

In Summary

Although I have always drawn a very clear line between my trading activities and my general perspectives on the financial markets I cannot help but be concerned about what Greenspan once aptly defined as irrational exuberance. It seems we are driving higher and higher while at the same time participants are growing more and more fearful of the final price that may have to be paid. And I do not think that this is concern usually generated by hindsight in that early bull markets climb the wall of worry. In closing the best way to summarize my concerns may be simply by stating that we ‘may just have gotten a bit ahead of ourselves and that there will be price to be paid in the end.’

2017-04-12_SPY_seasonality

On the trading front I am already adjusting by reducing my position sizing to < 0.5% across the board. Short term we are heading into seasonally positive territory. So at least in terms of timing this is not the moment to be thinking about large bets to the downside.

2017-04-12_gold_update

Before I go here’s a quick update on gold and then I’ve got a juicy entry for my intrepid subs. You may recall the 1278 target on gold I pointed at a few days ago. We are there now and if you are holding positions then you may start scaling back a little. However, this has all the telltale signs of a possible runner and it’s quite possible that it’ll just continue higher from here. In fact if it dips lower for a retest then I’ll be sure to look for a long entry opportunity next week. As a sidenote – surprisingly silver was lacking behind, although it’s pushing up now as well it took a bit of a detour first. Both look very bullish on a medium and long term basis however.

evil_separator

It's not too late - learn how to consistently bank coin without news, drama, and all the misinformation. If you are interested in becoming a subscriber then don't waste time and sign up here. The Zero indicator service also offers access to all Gold posts, so you actually get double the bang for your buck.

Please login or subscribe here to see the remainder of this post.


About The Author
The Mole
Mole created Evil Speculator amidst the chaos of the financial crisis in early August of 2008. His vision for Evil Speculator is a refuge of reason, hands-on trading knowledge, and inspiration for traders of all ages and stripes. You can follow him and his nefarious schemes at various social media waterholes below.
  • http://gerb-reloaded.blogspot.com/ Gold_Gerb

    *Nothing to do* – check.

    TLT Weekly, getting downright perky.
    Hasn’t been above the RSI 50 in months. AND a vacuous range right above it.

    http://stockcharts.com/h-sc/ui?s=TLT&p=W&yr=3&mn=0&dy=0&id=p07667191012
    -GG

  • StockTalker

    Could be “The big one Elizabeth”

  • StockTalker

    Market feels heavy for a change.

  • Yoda

    Outstanding post Mole. Thanks.

  • http://gerb-reloaded.blogspot.com/ Gold_Gerb
  • OJuice

    If /ES can hold above yesterdays lows we have another $VIX divergence forming. First from the 3/27 low to 4/11 low. And now on a smaller scale between yesterday’s low to today’s low. $VIX keeps surging.

  • Yoda

    I do not recall seeing such trend day alert ever.

  • http://evilspeculator.com Sir Mole III

    Thank you sir (or madam)!

  • evilasevildoes

    good add placement Mole at Financhill.com

  • StockTalker

    Retest coming

  • Darkthirty

    What is being retested?

  • http://evilspeculator.com Sir Mole III

    Actually I’ve got a white label version there which uses my special indicators and thus is geared toward my lens.

  • Mark Shinnick

    Its our survival as traders.

  • OJuice

    Citigroup, WellsFargo, and JPM all set to announce before tomorrows open. This might be a catalyst for some more definitive movement.

  • Mark Shinnick

    UAL, the company that called the goons to remove a paid passenger in good standing from his seat ; no material change in pricing since last week.

  • StockTalker

    /ES 2318, GG has a chart below, most recent low. If 2300 fails think we get a good correction.

  • Ronebadger

    UAL – Our new rewards program automatically enrolls you in Fight Club.

  • Darkthirty

    Could be, watched 3 failed attempts of algo ramps today

  • ZigZag

    Yes it says sample size = 1,1 tick bars, 100% probability

  • StockTalker

    Flatlined

  • Darkthirty

    Looking for 15 on the RSI 5 60 minute DJI

  • BobbyLow

    LOL

    Over the years, my survival as a trader has been fortunate and somewhat similar to how a cockroach has unconsciously and unceremoniously survived blights, wars and everything else since the beginning of time. :)

  • Mark Shinnick

    Short miners.

  • Mark Shinnick

    …Raising stops to suit.

  • Darkthirty

    Short ES

  • CandleStickEmUpper

    Good point, everyone always assumed Yoda and Skywalker were males in the movie. In this day and age, it could be tricky.

  • http://evilspeculator.com Sir Mole III

    Not a spot I would pick to get involved but alas…

  • http://evilspeculator.com Sir Mole III

    Sorry, something must have blown up there.. :-(

  • http://evilspeculator.com Sir Mole III

    Not being politically correct let me point out that over 80% of traders are male. But the few female ones happen to be very good, representing the outlier samples who manage their emotions well and combine that with female intuition and a knack for numbers. But yeah – having picked “Yoda” as a callsign – odds are it’s a dude 😉

  • Darkthirty

    Got my ass bit! Us greedy bastids are used to it…..

  • http://greenlander1.blogspot.com/ Greenlander

    Added a bit more VXX short

  • Mark Shinnick

    Yeah, just like good market models, we have to wind-down / wind-up appropriately.

  • ridingwaves

    sold SAEX on pop and bought back in…getting some overhead resistance on 100sma
    bigger move is building….

  • Darkthirty

    Shoulda said ” Hold my beer and watch this!”

  • Darkthirty

    running EW2 options, gotta be fast. 10 pts is 2X

  • Darkthirty

    FWIW your post today is on target

  • Mark Shinnick

    Vol appears to be getting a bit stale-dated.

  • Ronebadger

    Where’s Trading Mom???

  • http://greenlander1.blogspot.com/ Greenlander

    Yeh I’m avoiding fins. Looks like regionals could get a pop like BNCL but so much of a run up a bit leery of what could happen if support fails

  • http://greenlander1.blogspot.com/ Greenlander

    I really like how biotech is behaving here. Debating whether to add some more names

  • ZigZag

    well up to now it has, in fact, been trending down, so it was right 😉

  • http://gerb-reloaded.blogspot.com/ Gold_Gerb

    The Cadbury effect.

  • ZigZag

    wow gold, bonds, currencies on the move and a big nothing burger so far for equities. see if they follow

  • Mark Shinnick

    Stop hit and reversed to long miners.

  • ridingwaves

    it’s been a giant consolidation in the applicable indexes….
    Bio is coming into a good seasonality play but right now the market seems so weak….a lot riding on tomorrow, always hated shorting during earnings season….Mole caution statement seems so on target

  • Darkthirty

    Signals are whacked………..

  • http://greenlander1.blogspot.com/ Greenlander

    Yeh the fact the indexes are barely moving and chopping and VIX is trying to claw up is pretty bullish to me. I am more worried about downside in later May/ June

  • Mark Shinnick

    …as in Heisenberg?

  • ridingwaves

    2278 spx still in play if earnings bomb for banks reporting tomorrow….
    seems like the pivotal moment right before Easter break…

  • http://gerb-reloaded.blogspot.com/ Gold_Gerb
  • Yoda

    The Orange Clown clubbed bucky today

  • OJuice

    Agreed. Gap up tomorrow for the bullish case to remain in play for me.

  • Mark Shinnick

    Yes, nice… the hopeful bear melting into his own expectation of outcome.

  • Billabong

    Approx 15:11 … PMs up, $ weakend …. And somebody was buying a lot of bonds at 15:03.

  • Yoda

    in my view, that was the only + thing he did for MAGA since his nomination

  • Mark Shinnick

    Amazing stuff… broke the most recent range mold of miners.

  • http://gerb-reloaded.blogspot.com/ Gold_Gerb

    and that’s why I have a ratio chart.
    to be continued..

  • Billabong

    MAGA?

  • BobbyLow

    Overcame my deficit from yesterday to get to the Plus Side for the week so all’s fine one day at a time. :)

  • ZigZag

    I scalped my way to the plus side today, but it felt like running out on the highway to pick up change lying in the lanes.

  • BobbyLow

    I used to do a lot of scalping but the wear and tear got to me. I’ve been trying to maintain a steady pace in a slower lane but not so slow that it looks like I’ll never be able to get to where I want to go. If that makes any sense. :)

  • Darkthirty

    I look at it like walking into a biker bar wearing wingtips, argyle sox, and a sweater vest…..something’s gonna happen!

  • Yoda

    where were you during the elections? 😉

  • http://www.captainboom.com/ captainboom

    Make America Great Again

  • BobbyLow

    I was in a very tiny minority here prior to the election and all I can say right now is that I hope I was wrong. So far it doesn’t look that way but it’s still early and “hope springs eternal”. :)

  • BobbyLow

    Hey seeing that the market is closed, just for the hell of it can anybody tell who is in this very old picture? For those who can remember her the answer will blow your mind. :)

    https://www.google.com/imgres?imgurl=https://s-media-cache-ak0.pinimg.com/736x/95/5f/92/955f921d09c515b1af865d636609a9ec.jpg&imgrefurl=https://in.pinterest.com/explore/frances-bavier/&h=236&w=214&tbnid=f8_0U57v9w_jfM:&tbnh=186&tbnw=168&usg=__D-zCFWAbC67l_XHOhcbT_2Froj8=&vet=10ahUKEwib59-4kp_TAhXEeCYKHbwEBHIQ_B0IggEwCg..i&docid=FM1biLrDoGVU4M&itg=1&sa=X&ved=0ahUKEwib59-4kp_TAhXEeCYKHbwEBHIQ_B0IggEwCg&ei=vjvuWJsQxPGZAbyJkJAH#h=236&imgdii=FzNuJ4bFk3dtpM:&tbnh=186&tbnw=168&vet=10ahUKEwib59-4kp_TAhXEeCYKHbwEBHIQ_B0IggEwCg..i&w=214

  • Darkthirty

    Janet Yellen?

  • BobbyLow

    Good guess. :)

    I found this picture while I was reading about Andy Griffith and the Andy Griffith Show (Sherriff Andy Taylor) of Mayberry from the 60’s this morning.

    This is a picture of Aunt Bee!

  • CandleStickEmUpper

    HotOptionBabe was another

  • Darkthirty

    Hmmm..

  • Yoda

    through your wisdom and experience, you were able to cut through cowpoop and see the truth reality of what would be coming up.

  • http://evilspeculator.com Sir Mole III

    Elyse Knox Harmon – when women were still glamorous.

  • http://evilspeculator.com Sir Mole III

    Boy I got lucky today. Made a shopping run and picked up a wad of Euros just an hour before Trump basically kicked the Dollar in the nuts.

  • BobbyLow

    Thanks for your kind words Yoda.

    FBOW, what’s done is done and all we can do now is hope for the best. On a brighter note, we survived Presidents LBJ, Richard Nixon and my generation’s Viet Nam War (I was in the military 1963 – 1967) That war began with advisors in the early 60’s and cost 58,000 American Lives by its end in 1975. But it didn’t keep us from banging away in the Middle East and other armpits of the earth like Afganistan. I’m not talking about going after terrorists, I’m talking about nation building.

    After 9/11, we had a worldwide license to go after terrorists everywhere. But the “decider” GW “decided” that it was best to take out Sadam Hussein, find the WMD’s and plant out asses in Iraq to win the hearts and minds of the masses there. We all know how well that turned out. BTW, I guess they’re still looking for the WMDs.

    I think we’ll survive this as well. And again, I really, really hope I’m wrong and things work out OK with our current situation at hand.

  • http://gerb-reloaded.blogspot.com/ Gold_Gerb
  • Yoda

    Yeah, things started to go downhill after Reagan, the last great POTUS.
    My worry is that the elite is realizing that they are losing control of the pleb and are willing to go “all-in” now to complete their nefarious NWO scheme.

  • http://evilspeculator.com Sir Mole III

    Yeah I don’t know what he’s referring to either but for sure he has good taste in women. They don’t make ’em like that anymore – compare Grace Kelly for example with Lady Gaga or any of those other clowns they’re pimping these days. No contest, sorry – a woman with class is simply timeless.

  • Darkthirty

    I’m ADHD and goal oriented. The EW options are fast AND profitable. I don’t understand “R” but you can 3X most days.

  • BobbyLow

    Reagan was a good President but his administration also had flaws as they all do. It’s all about power, who has it and what they do with it. I’ve voted for the “lessor of two evils” since 1964.

    Although I consider myself a political moderate, my core beliefs are all over the place. Most of the time, I’ve voted against a person instead of for a person. Sometimes this has been a very difficult choice.

    For the record, I voted for Reagan twice but I also voted for Bill Clinton twice so you can see there’s quite a disparity there. If I had it to do again, I would do the same thing based on who was running and what was going on at the time.

    I have to laugh about Bill Clinton though and the main thing I liked about him is as how George Carlin described him, “Hi my name is Bill Clinton and I am full of shit, please vote for me. When Bill got caught in a lie he would simply say “what I meant to say was. . .” and change his story. OTOH, we have “The Donald”, who is tremendously full of shit and lies about stuff that he doesn’t even have to lie about but does it anyway. When someone challenges something the Donald has said he just answers with something to the effect of “Fuck You” – Quit believing that fake news along with everything you see with your own eyes.

  • BobbyLow

    I might have got my wires crossed here but when I was reading about “Aunt Bee” Frances Bavier, from the Andy Griffith Show of the 60’s it cross referenced the picture that I posted. When I looked at the nose and eyes of Frances Bavier there is a strong resemblence after 30 years and a lot of weight had been put on.

    OTOH, it could be Elyse too. :)

    https://en.wikipedia.org/wiki/Aunt_Bee

  • http://www.captainboom.com/ captainboom

    Read an interesting book over the winter. One Nation Under God: How Corporate American Invented Christian America, by Kevin Kruse, a history prof at Princeton. I thought it was a well researched book. i.e. It has an extensive bibliography to back up what he writes.

    Synopsis is that it started when monopolists in the 30’s and early 40’s enlisted preachers to preach the gospel of capitalism, as research showed that preachers were the most trusted people in America. The monopolists weren’t having much luck doing it themselves, as the public saw through the ruse.

    Big push in the 50’s when Eisenhower was president, adding things like ‘under God’ to the pledge of allegiance, starting the national prayer breakfast, etc. Billy Graham was an astute political player in much of this.

  • http://evilspeculator.com Sir Mole III