Now Reading
Momo Update W1817
23

Momo Update W1817

by The MoleMay 3, 2017

Yes, we are already three days into May but this kind of analysis takes a good mixture of time, attention, caffeine, and inspiration. But I think your patience will be well rewarded as we’re going to look at some rather fascinating charts. Now two weeks ago I posted a quick update which suggested that we may be at short term lows (on a daily basis) and that a reversal to the upside had good odds. Which is exactly what happened the Monday after when equities painted a big gap higher. You’re welcome, but thanks don’t pay the bills, so instead just sign up as a paying member and we’ll call it even

2017-05-03_NYA50_NYA200

And if you recall the open question was whether we would we would see a second leg down or a push to new all time highs. Now we came a long way courtesy of one big gapping action on 4/24 with some follow up the following two sessions. But since then it’s been a slow sideways grind with very little participation. So what gives? We’re stuck here below the all time highs and there’s no interest in actually breaching them?

2017-05-03_SPXA50_SPXA200

If it makes you feel any better, it’s been an equal opportunity market of confusion. Rapidly falling breadth suggested a correction was due several months ago already and instead we got a few more months of relentless upside. Which is why I continue to exert caution when it comes to calling intermediate highs in equities.

2017-05-03_VIX_below_11

But the center theme of this post is implied volatility which means we’ll be covering the CBOE VIX and several of its IV derived cousins. The former has now descended all the way down toward the 10 mark and even scraped single digits for a moment on May 1st. Which had not happen for an entire decade and thus instantly triggered calls of irrational exuberance unheard of since the Greenspan days.

Record Lows in IV ? Record Highs In Equities

I fervently hope however that the very same people who are pointing at single digits in the VIX as a tell tale sign of a complacent bull market don’t fail to mention that those extreme lows in IV were never accompanied by all time highs on the equity side. Instead it usually took several more months until the first few waves of corrections started to throw a monkey wrench into an effervescent BTFD bull market.

2017-05-03_VIX_easy_times

Here we’re looking at rate of change, which is one way of talking about realized volatility on what in this case is implied volatility. I call this the ‘easy rides’ chart as the green areas depict periods in which being long has the best odds. More upside can continue after that (cyan areas) but it is usually accompanied by more erratic market sentiment.

What’s worth pointing out in the current green phase is that it actually should be a continuation of the cyan region. The reason for that is that the ratio did not push above the 50 mark and until that happens we have not produced a convincing enough low.

You may note that we may be dropping below the -50 mark in the near term future. But be advised that judging by previous occurrences it’s a long way from there to any bearish looking periods.

2017-05-03_VIX_VXV_divergences

Just like the previous one this VXV:VIX ratio chart depicts the relentless strength of the ongoing bull market. We have been seeing bearish looking formations across various timeframes but they often get either bulldozed or do not reach maximum potential. Thus retracements are brief and relatively shallow.

So what actually does work for calling medium or long term tops and lows? As usual I have to keep the best for my intrepid subs:

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.
  • BTrader

    Great post and really important for bears to understand!

  • Ladywandering

    thanks for this!

  • BobbyLow

    “I fervently hope however that the very same people who are pointing at single digits in the VIX as a tell tale sign of a complacent bull market . . .”

    Anyone remember when below 30 was a complacent market? Then it went down to below 20 and now it’s below 10. I’m beginning to think that the VIX really doesn’t matter and that the only thing the VIX is for is so that Option market makers can print money. But WTF to I know?

    Just a friendly reminder that it’s “that time of the month” again. Happy Fed Day everyone.

    Do you know where your money is? :)

  • http://evilspeculator.com Sir Mole III

    “Anyone remember when below 30 was a complacent market?”

    Not really. I think traditionally anything below 10 is considered extremely low vs. anything > 25/30 is pushing into extreme fear. Note of course that the distribution favors the bearish scale, we ought to be throwing a log on the VIX in order to get a more normalized view. Alas fear is tough to rationalize 😉

  • http://evilspeculator.com Sir Mole III

    Damn I’m exhausted now – this post took me five hours!

  • Ronebadger

    Good stuff…thanks!

  • BobbyLow

    Sorry about the “Below 30”. This was an exaggeration on my part. However, I remember back in the 90’s (during my naive CNBC days), when fear didn’t come into play until above 20 on the VIX.

    But the Fed took a large amount of fear out of the market with Quantitative Easing. They rewarded the same Investment Banks that almost killed our economy by flooding them with money. Excessively low interest rates have killed financial incentive for savers and forced people into the equity markets who shouldn’t be there.

    But it is what it is and I suppose even though I don’t have to like it, I do have to adapt to it. :)

  • Tomcat

    1 min to take off

  • Tomcat

    No more bets

  • BTrader

    slowest reaction to fed in years!

  • Tomcat

    “but the fundamentals” according to FED “remained solid”
    So whats there to re-act, as opposed to act?

  • Tomcat

    I REALLY like the dollar here. Will add on strength.

  • Darkthirty

    Gap fill

  • http://evilspeculator.com Sir Mole III

    I can appreciate your anger and frustration regarding the collusion of the financial and political elites. Unfortunately there is very little we can do about this as voting apparently has zero impact on their grip on the system as a whole. This will only resolve itself on a long term basis after a series of systemic shock events that come out of nowhere. Now that’s perhaps exactly what many have secretly been hoping for, but trust me when I tell you that it will get very very ugly for everyone before it’ll get better.

    Living over here in Europe I come across news and events on a daily basis that deeply frustrate me – you guys have little idea what’s really going on over here, it’s depressing. Knowing the prevalent mentality across Europe I realized however that things will invariably have to play out as the voting masses simply pay little attention to the issues that are important and affect them and their children over the long term.

    A few years ago I mused about this very topic and my conclusion was that we may just be all long dead before things really come to a point – if we’re lucky. It seems best to not worry about this stuff and instead focus on the things we do have control over.

  • Darkthirty

    I’m using it to confirm ES turns, VIX up ES down……….

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

    USD,
    gap up next week. I guarantee.

    http://finviz.com/futures_charts.ashx?t=DX&p=h1

  • http://evilspeculator.com Sir Mole III
  • http://gerb-reloaded.blogspot.com/ Gold_Gerb

    whoa whoa, what Happened to Disney?

    I thought Captain Jack had it all settled down last week?

    https://uploads.disquscdn.com/images/3e81e207571b510609767207f52661c5d2108ee53fe715a5c97a0c266a0bca2b.png

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

    Disney drops can foreshadow soft periods.
    It’s a leading indicator theory.

    https://uploads.disquscdn.com/images/bdfb1814f05058dcea369568b9d076fcdfc2e1e6830ed273f44062a4bb85066b.png
    -GG

  • http://evilspeculator.com Sir Mole III

    Proven how and where?

  • BTrader

    Picture perfect zero day!

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

    I remember when I was a kid (long ago) my dad would listen to the news on radio and comment bitterly about politicians and other things he had no control over.
    My childish observation of the uselessness of that shaped me to be aware of what is going on but not expend to much energy on what I can’t change.

    I think much of the bitter complaining over the various manipulations of the financial world are more of a way for people to avoid taking responsibility for their own trading failings than anything else.

    If you are a rabid bear in a bull market the fed makes a good scapegoat for your failings.