FEAR

Fear now permeates markets across all verticals – I’m seeing massive swings and intra-day gyrations that are almost guaranteed to touch anything but the most generously placed stop loss measures. Nothing expresses what’s going as well as the VIX and its sub components – I’ll walk you though the basics:

I wanted to know when actually was the last time the VIX touched the big 30 mark (which separates meaningful corrections from anything else). Took me quite a bit of zooming out as the last occasion was on December 8th, 2011. We all looked a bit younger then and it’s been one big party for the bulls since since then. So there’s that – a touch of the magic 30 mark but that’s not all, we dig deeper. On the last panel you see a ratio most of you guys usually ignore – the VIN vs. the VIF. So let’s talk about those two.

The VIX is not just calculated from strikes belonging to one single month. It’s more of a sliding window of sorts with its left shoulder nearby and the other some 30 days ahead which may be in a different expiration month. The near term IV is measured by the VIN and the far term IV by the VIF. If you ratio them against each other you know if options which expire soon are priced unfavorably (or favorably) against the ones somewhere in the back. And what does that tell us?

Well, as usual it’s all relative – look at the arrows I drew. What stands out is that in the past few years we see big spikes in the ratio which actually exceed the current reading. But wait – how can that be if the VIX hasn’t been touching 30 since the end of 2011? Good question! And I’m glad you asked!

Think about it – if you see a sudden spike very near term which quickly falls apart then one can presume that it’s most likely an abnormality which took folks by surprise and pushed the ratio outside its normal standard deviation. What we’re seeing right now however is a pretty orderly increase across the board accompanied by a 30 reading. And that tells us that something is different this time – and I believe it’s a genuine sense of fear.

I mean just look at the bonds – that was a massive spike (some of which Thor actually enjoyed quite a bit – snicker). Massive reversal since then but something tells me that we’re not going to simply go back to ‘business as usual’ after this. The cat is out of the bag and the bulls will have to work overtime now to avoid what may follow:

And this is what I am talking about – the LT panel on the E-Mini says it all. Nice safe of the lower 25-week BB – that’s quite positive as of right now. However as of today we still have a monthly sell signal on the books and nothing short of a recovery above ES 1923.5 before the EOM is going to hand the reigns back to the bulls.

What I’m seeing right now on the Zero does not look encouraging. Look at the signal strength on the way down and right now during this bounce. This doesn’t look like enthusiasm to me – those are strong hands accumulating near the current lows. Good stuff and their boldness has been rewarded but what matters the most now is what comes next.

Perhaps this has only been a temporary weakness which forces the Fed to relinquish another round of quantitive easing, and thus resulting in a squeeze higher and back to the ‘good ole’ days’ for the bulls. And in that context this spike higher right now may actually be needed. We all know what an outright panic in the markets will trigger in Washington – more of the same that has worked so well over the past few years. Which continues to be the Achille’s Heel of the bears – that eternal Fed put which restores market order at the slightest hint of a drop.

Unfortunately these are considerations beyond our pay grade – they are untradeable. I do think about these things but I don’t mix them with my trading, for obvious reasons: you must not worry about things outside your control. So given that all that’s left to do for us right now is to monitor the tape and look for clues that point either higher or lower. Given what’s going on right now I don’t see good buying opportunities, it is too easy to have your stops run and we would not be buying (or selling) from a position of strength. Which is the problem during deep corrections – volatility will make getting positioned very difficult UNLESS major inflection points are being touched. And that has not been happening – we simply reversed somewhere in mid air. Even intra-day trading has been difficult – over the past few days some of you may have been reminded of the type of tape we saw during 2010 and 2008. Massive drops followed by sharp pull backs. On the daily panel it all looks like one big slip off the banana peel but if you were there you remember differently.

Bottom Line: All that matters now is the follow up. Nothing but a concerted buying binge toward ES 1923.5 puts the bulls back in the game. Until that happens we are in bear territory – so watch your ass and be polite 😉

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.

Cheers,