A Bit More Clarity

If I would have had a crystal ball last week and known that new jobless claims would double that of the 3 Million the week prior, I would have without doubt backed up the truck on short positions with a considerable chunk of my capital. Although I suspected the report would be bad I had no idea HOW bad – and frankly nobody else did either. But I am glad that I didn’t because Ms. Market would have stomped on me without mercy.

In fact equity markets remained fairly chill throughout the week with realized volatility dropping steadily as price swung in an unusually tight range – at least compared with what we’ve just been through over the past month.

In case you wonder Pinchy Winchy was a game the Marx Brothers used to play with each other back in the days. It involved pinching the cheek of the guy next to you and I guess the loser was whoever didn’t find another cheek to pinch back.

Hey, don’t judge them too harshly – that was way before cable TV, the Internet, or computer games, or online p0rn.

As you can see the VIX continues to drop steadily and is expected to open around the 45 mark. Those are almost bullish levels in comparison! However let’s keep our enthusiasm as anything over 30 is considered bear market territory. So we’ve got a long long way to go and as I mentioned on several occasions – a spike like this doesn’t just resolve back into a LV bull market.

What I’m banking on instead is a significant correction that gets smashed to pieces come earnings season. Which is now getting warmed up and we should see a bit of fireworks after Eastern.

The graph above shows the Implied Volatility Term Structure plus our smoothed control signal (there is also a free version without it for you leeches). If you bought the Options 101 course then here’s a very cool intro that’ll teach you the in’s and outs. In that context, I’m getting close to recording the 201 course which will focus on vertical and calendar spreads – quite essential material for anyone considering to trade options.

Anyway, both signals are pointing down which is pretty good news, however once again we are far far away from any sense of normalcy (i.e. < 0.95 which is the LT median).

It’s only going to be a 4-day trading week due to Good Friday and this week’s expected move stands at a paltry 97 and change. That’s about half of what we saw a week or two ago! For the coming two weeks we are looking at about 156 handles in either direction and frankly I have a hard time wrapping my mind around that.

Either equity traders are once again undervaluing forward risk or there’s a chance we actually embark on a massive counter rip this week. It bodes pointing out that the SPX remained inside its EM all last week – we didn’t even come close to either threshold.

Given that here’s my current perspective on equities:

• The sideways range we’re starting to paint is our market quarantine zone – nobody is going anywhere.
• If we pop above ES 2650 then there’s a good chance higher we are going to see a buying frenzy that puts us back on course to the 3k mark.
• A drop below ES 2400 is bad medicine as it significantly diminishes the odds of a counter rally.
• Below ES 2200 we are looking at a Bad Easter Bunny scenario – the abyss beckons.

Let’s get you guys updated on some open campaigns. My ZB trail remains at break/even although there is a pretty good chance it’ll get touched. Trading volume has been lousy here already over the past week and unless things pick up here quickly I’ll give it another whack after the holiday.

Gold is alive and well – ISL remains.

My trail on the DX also remains – I think this one has better odds than the ZB. Dolla’ dollar’ bills y’all!

GOOGL was an in/out put spread to me and as it’s below 1100 (my short leg) I’m closing it out. Baby steps folks – baby steps 😉

Ditto on FB – everyone loves a happy ending!

USO is awesome and I’m going to hold this for quite some time to come. Stop remains where it is.

Ditto on HAL – it hasn’t progressed as far but that was quite a jump. I know it doesn’t look like that but a push from 4.70 to 7.20 is a 35% jump.

I’ve got two more goodies below for my intrepid subs:

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