3 Attachment(s)
Extreme Complacency – March 13, 2012
Waiting for Tuesday’s Fed decision, volume in this NBA (Nothing But Apple) market was once again abnormally light and the 20 DMF closed back in negative territory in confirmation of its short signal. One remarkable event is the big drop in volatility with the VIX closing at a new YTD low far down in Complacency Land.
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Tom McClellan in his Daily Market Report has an interesting look at the observation:
“One explanation for this is that Greece has been able to push through its PSI (private sector involvement) deal to reduce the payout to bondholders, and the world did not come to an end. So all of the CDS (credit default swap) backers, who themselves had hedged their own risks in various ways, are pulling off those hedges and tanking options prices. But I figure that anytime there is a mad rush for the exits, even if it comes out of panicked bullishness, the rushers are bound to be proven wrong. (…) Interesting point is that these readings can come both at the beginning of a strong new uptrend, and at the end of one as complacency leads to a rush out of volatility premium on the SP500 options. You have to figure out for yourself which it is. Given that this particular one comes on a day when the SP500 closed basically unchanged, and with the VIX already at a low overall level, it seems much more likely in my eyes that this is a last gasp spike rather than a sign of upside initiation. (…) It should not take all the way until the end of this week for this panic out of volatility to start to matter, and start to move prices the other way as the pendulum swings”.
This commentary would be coherent with my view that market makers have not been focused on institutional bids during the last bounce (large players were not participating anyway) but took a short term arbitraging advantage of the CDS-related un-hedging phenomenon heading into triple witching option expiration week. They are now waiting around the Monthly equilibrium pivot (81.36) to see what’s next from institutional investors reaction to Tuesday’s Fed announcement. It probably means that their inventories are currently risk-neutral and flat for the end-of- month horizon. Being at equilibrium, they now have all freedom to take the next large players’ train if a strong institutional demand or supply emerges in their order book. I think it should quickly solve the whipsaw conundrum equation from our market model.
We’ll see if a retest of the 50 dma (79.57) is necessary first to stimulate large players’ risk appetite or if the robot stop at 82.77 will be hit instead with a technical retest of February highs. The objective odds remain tilted toward a short term selloff and I see no reason to deviate from the robot’s trading plan. An entry today at the advised 3:1 reward-risk ratio limit of 82.42 looks attractive with a (discretionary) stop on a decisive breakout above Monthly R1 (83.08).
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For GDX, the PM Money Flow is still showing some resilience and the number of days until the next signal has not varied much from an average of 2.5 days over the last week. This is a hold-the-short-position, respect-the-trading plan- and-stop, wait-and-see situation. (Excuse my faltering English!) No new advised position here.
Billy
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