End Of The Line

The past two weeks have been rather turbulent and I’ve worked overtime to keep you guys out of harm’s way and hopefully ahead of the tape. On Thursday I decided to take a step away from the markets in order to gather my thoughts and to not get sucked into the maelstrøm of emotions that has continued to roil the financial markets. Having regained a bit of distance from the daily noise here’s my general perspective on the most plausible scenarios going forward:

We currently find ourselves in a very strange upside down situation. For one the long campaign I initiated a week ago has gone pretty much nowhere and is most likely at the brink of getting stopped out near the open.

However the lackluster follow through is not exactly bad news in that we have an immense amount of fear in the market in the face of a global viral epidemic threatening the life of potentially millions of senior citizens and people with impaired immune functions.

A high volatility wipe out lower in the early stages of a bear market is typically followed by a pretty violent retracement. Therefore a quick push back into ES 3200 would have been much more true to form. A lackluster swing back lower on the other hand opens the door to a retest of the lows followed by another spike higher.

That said – I expect a breach through ES 2850 to be lethal as it would trigger a boat load of stops that in turn would lead to massive panic selling. So in short – as long as ES 2850 remains in place we do have about a 40% chance of another run higher, but every tick lower from here increasingly diminishes this scenario.

Nothing positive to report on the implied volatility front. We are still far outside the realm of normalcy and although there had been a slight reversal in the IVTS on Wednesday it jumped higher again during yesterday’s session.

As I predicted on various occasions over the past two weeks, high implied (and realized) volatility is here to stay with us for the foreseeable future.

Meanwhile gold has been a veritable tear and is now approaching its previous spike high slightly below GC 1890. This is not very surprising as gold usually benefits from a LV sell off but often suffers during massive shakeouts in equities that leaves investors/traders scrambling to cover outstanding margin calls.

On a long term basis gold looks bullish as hell and unless a miracle cure for Covid-19 makes headlines it seems that GC 1800 is pretty much baked in by the end of spring or early summer.

However nothing captures the amount of fear in the markets like the massive spikes in bonds across the board. The 30-year bond futures shown above have basically gone exponential, which is unsustainable on a medium to long term basis but on a short term basis may extend into ZB 180 or higher.

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