WAITING TO JOIN THE DARK SIDE
2016-11-02 1pm EDT | #stocks #VIX #volatility #FOMC drift
Traders who were lucky enough to load up on VIX finally have something to celebrate. Yesterday the stock market sell off accelerated, slicing through some key support levels.
The VIX spot index spiked higher.
The stock market bears have been emboldened. Things are finally falling their way.
It seems like the perfect time to push the short bets. Yet the MacroTourist is not so sure about joining the dark side down here.
I acknowledge the US election holds tons of risk. And although there is obviously the potential for a big sell off, there is also the potential for a face ripping rally to the upside. I expect next week to be filled with all sorts of rumours, spikes on headlines and anxiety. It might be a fine market for zipping in and out, but for a trader with a daily time frame, it will be choppy.
If you are bearish, unless this is the start of the “big one,” the next week will have rallies that will be difficult to sit through.
For me, I am covering all my long equity volatility trades and heading to the sidelines. I might miss the next great crash, but so be it.
My favourite short term indicator, the 20 day 1.5 std dev Bollinger Band has issued a buy signal.
The VIX futures curve has inverted. VIX spot is trading at a higher price than the 3rd month futures.
Although during the past couple of years the VIX curve has inverted way past 0 during the intense sell offs, previous to that, the 0 level was often a great place to bet on the decline stopping.
And let’s not forget the US dollar. I have long said the US dollar was the key to risk assets. If it can stop climbing, then equities have a much better chance of heading higher. Don’t look now, but it looks like the US dollar might be rolling over.
Finally, I would be remiss if I didn’t mention the FOMC drift. Even the NY Fed is aware of the tendency of the market to rally on Fed days (see paper here).
When I combine all these factors, I think there is a decent chance the stock market decline will stop today. I don’t know for how long, and I am not predicting a ramp back to new highs. But for me, I am not getting all beared up down here. I am going to wait and see what Lord Vader has on offer before I commit to joining the dark side.
Thanks for reading,