Mid Summer Momo Update

It is hot and it is humid over here in Valencia. You want to know how hot? The other day a poodle’s tail caught fire just waiting in the sun. The more frantically he was wiggling his tail the brighter it burned. Fortunately his master was nearby and was sweating so much (overweight Brit) that he was able to put the fire out with his bare hands. True story! Well, maybe not – but that’s definitely how it feels over here. Fortunately the evil lair is equipped with an industrial strength A/C unit which will continuously run on its polar bear setting until late August. If the power goes down I’m dead meat as I have a high tolerance for heat but a very low one for humidity. 

Alright, so I don’t really feel like putting up setups today, in particular since most of you guys are either on vacation or too lazy to actually pull the trigger. Let’s do a mid summer momo update instead – we’ve got interesting developments on all fronts and if you’re holding long here then you may want to pay attention.

Simple stuff first – realized volatility. Take a look at the blue squares I highlighted on the chart above. Each time we are seeing an explosion in RV – twice to the downside and the most recent one to the upside, burning any remaining bears into potash. What interested me the most is what follows, during diminishing volatility back below the normal range of about 100 and 50.  Back late last summer equities whipsawed around but eventually corrected to the upside. Lather, rinse, repeat early this year after we touched the ES 1800 mark.

A Fork In The Road

Now look at the current ‘corrective’ RV period and what price is doing: It’s continuing upward, which essentially is bullish as frogsleggings (don’t ask). However, it’s also fairly clear that this leg higher has seen its best days and is on the verge of either: a) blast higher and paint an exhaustion high or b) start correcting soon. So which’ll it be?

I’m glad you asked. Although I don’t know the future either I am pretty good at narrowing down possibilities. Right now today we’re about at the 50/50 mark but that one is quickly shifting as we are pushing into the ‘shit or get off the pot’ phase. Look at the VIX:VXO ratio above. There is definitely space left to run but we’re starting to run out of oxygen here and the sherpas are looking concerned and are whispering with each other. Probably debating which part of me they’ll be eating first.

Here’s the VXO on top of the VIX and as you can see both of them are dropping into the abyss here. These are prime conditions for a final blast higher. BUT it needs to happen this week or gravity will exert its influence. You can only keep mooning folks for so long until someone decides to give you a spanking. I know too many butt related jokes today – must be the heat.

More sub belt-line humor and momo charts below the fold:

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