July 13, 2021

Volatility Reports 7/13/21

A long-time mutual fund type said Monday there is no “bell ringer” of excessive optimism by the markets that would give a “risk-off” signal.

That in and of itself is a bell ringer because it’s not the train you see that will kill you, it’s the one you don’t see.

I’ve written in these pages that the panic pandemic sell-off was not a black swam. It was a known unknown because it was news in the public domain in 2019 hence the 19 in Covid19 yet the market in its blithering way advanced into February 19, 2020. Just like the run-up by Enron in 2000, where the news was out regarding its accounting practices, yet it climbed to all-time highs on August 23, 2000. Here again, a known unknown, what I think of as dump risk assessment.

I am sure that many will think I am simply projecting. However, a “known unknown” is the risk a person or organization is aware of but is unaware of the size and effect of the issue. As I have pointed out along with several United States Senators my advisory told my people to raise cash, gave “off risk” advice in the early part of 2021.

“Hmm, potential pandemic, what risk?”  Yet the media and the administration downplayed it for a time.

For example, my Father founded a raincoat company in the 40s “Aligator Raincoat Company,” as in the overcoat that William Faulk adorns in the Columbo TV series of the 60s, and never took off. For my Dad a rainy day was a good day, for him, drought was a risk, a known unknown regarding when, where, and how long, and so on. A known unknown risk.

Today there is a clear risk to the markets and not the ones that we all hear streaming in social media. Since the Trump election, I am more aware of the Geo-Political problems that face the markets. From the internal issues in the USA to the international issues that exist with Russian hacking to China’s competition.

Previously the following chart has been used to point out that the pros, the smart money see tail risk – which is hyper-deflation or hyper-inflation. That must see a catalyst that would cause such an extreme, as drought causing hyperinflation. The chart data on the right is making all-time historical highs along with the data from the CBOE, both suggest protecting your risk investments.

Meanwhile, the advisors to the public, many of them compete with my publications are extremely bullish. Above levels seen before the 87 crash, the dot-com peak and the 08 WFC, and others.

Investors chasing yield in junk bonds have reached an extreme of greedy action. A sign of irrational buying that is associated with major turning points. The chart used here from CNN reflects that fact. 

On top of extreme sentiment supporting the bearish expectation of a topping process is the internals of the market have providing”off risk” signals.

The 52 weak highs MA10 peaked with the initial high by the Dow & Co back in May as this featured chart clearly shows. As well as the last two peaks preceding tradable top s of the major averages.

Our “Churn and Burn” index provided Contrary Thinkers with an “off risk” warning back in March of this year and as the title implies the market has churned under the annual highs of the Dow, highlighted by the blue dots on the chart. From the most recent breakdown by the index in May and three days ago, the market has been laboring.

MarketMap High Lighting Change

When cycles have discovered that track the market’s oscillations when the data is outside the market and outside any related news you would hear or read on Fox Business or CNBC.

The following chart is based on the geo-cosmic cycle, which is part of the January Fractal membership have access at the beginning of each year.  Here however I wanted to demonstrate how it stands along provides a “ball park time window when the market is expected to make a change of trend (COT).

Below are two cross-check charts starting with the 2009 low, and the 13-year cycles. The problem with many is they may be looking for 100% bottom picking and top picking ability. Where it a matter of evidence that supports the COT from different methods; and July 12-14 is a good example. A time window associated with extreme optimism as pointed out above along with other facts.

In any event, it’s fairly easy to see how the Geo-Cosmic oscillator’s turn dates line up near the COT dates of the Dow. Imparticuallry is the high pivot in late 2015 on the Geo-cosmic date of 7/4/2015, six years from our real-time window today. Plus it was followed by a meaningful trading market where our scalping systems and long VX system were put in their environment.

 Please note the same coincidence in changes in the direction of the market near the Geo-Cosmic peak and throe dates. What is more striking is the 3/9/20 low, the November 9/20 low, and the high dated 5/13/21 that happened when the Dow and offshore major indices made ATHs. p.s. There is no such thing as a “coincident.” 

Trade-Ideas

Buy FAZ at $27.75 or better  PT = $38.5 SL = $25.5 
Contrary Thinker sees a good chance of the high-risk players getting clipped here. The Bull ETF we want to play the bear side of invests at least 80% of its net assets in financial instruments, such as swap agreements, securities of the index, and ETFs that track the index and other financial instruments that provide daily leveraged exposure to the index. Other leading high beta indices have rolled over and are trending lower. FAZ is the bear trade with 35% S-T potential and 7% risk.  FAZ is 3X Shares seek daily investment results,  300% of the inverse (or opposite), of the performance of the Russell 1000® Financial Services Index.

Direction Neutral Thinking

A concept that for many is difficult and some may see as racially based on old habits. But the market’s background, its condition is not its direction, it is how the market is trading, is it flat and sloppy, is it choppy and range-bound, is it expanding its range or is it pro-directional trending; and has that condition reached an extreme and ready for a change to something else?  It’s a powerful concept once you “get it” and it provides better risk and opportunity assessments, as well.

Back in mid-June, I reported the expectation for lower prices into the end of July, and “thus far, the action has been bearish; the Cash S&P has traced out a clear five waves down with a clearly defined 4th wave triangle, which is now forming resistance (highlighted in blue.)”

The chart on the left presented TEM signaling a rule#2 predicting a strong trend after the next trend-following or breakout trigger. Well, CT’s bias was not placated. Instead, the S&P broke out and ran to new ATHs.

I think this will provide a better understanding of the Volatility modeling I do. In that vein, the daily TEM is on a new extreme rule #3, painting the S&P’s trend as being old, feeble, persistent but due for a change.

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