September 1, 2023

Volatility Reports 9/1/23

It’s all Hunky-Dory on Wall Street

What epitomizes the herd think best is a blog post “Busting 7 Common Myths,” which blames the media for over stating the bearish point of view. The post myth busting covered economic factors. The idea is if they can predict the economy, they can plan their investment plan in the risk markets.

I could leave it at that, they have enough rope to trip over. But I am sure you want to know what was “debunked” right? This duo wants to put a positive spin on Credit card debt, the increases in bankruptcies, the mixed earnings report by major retailers, and the coming increase in student loan repayments. All of that not killing off the backbone of growth the consumer and pulling the economy into a recession. Well at least they don’t want one to happen. Who does?

Thanks for their hard work but Contrary Thinker will focus on Dow & Co. That is where the rubber meets the road anyway. It is true that all bear markets do not predict a recession, but that is not our job. CT’s objective is to keep its people out of trouble (avoid risk) and point out where and when minimal risk/high reward opportunities exist. CT is off risk, hedged and long volatility.

Some bulls like to spitball because the trend is their friend

The trend will bail them out justifying anything they post in the public stream. Well, it’s boom times, and a twin peak only occurred 30 days ago. But Contrary Thinker knows, based on a valid body of knowledge, the following method being squawked about on X is suspect at best.

The vendor showed a SPY chart and explained, “Look every time we break the 50SMA (Simple Moving Avg) and create a cluster below and then RECAPTURE the 50SMA what type of moves tend to come after with confluence from MACD bullish cross.”

Well, I give it to him, only showing this strategy idea on a years’ worth of data is a bit cheeky. Given more data ten years or better.  With the idea in code, we see the outcome is much less than an ideal equity curve. It is a fact that many ideas seem intuitive correct when presented in a magazine article or a book with a cool name but when tested they do not hold up. MACD w/ a 50-day MA is one of them.

FYI, a simple tidal system that buys at low tide and exits at high tide is light years ahead of MACD. Here are the numbers from 1997 without 50-day MA filters, for that matter no optimization.

Now, regarding tidal cycles, and I pointed out to members and visitors in our LinkedIn space, several of the rules used in cycle theory. One, unlike a simple mechanical buy/sell every half of the 29-day cycle, is the change of trend (COT) dates are contingencies, the direction of the change depends on the direct of the immediate trend going into it.

So low tide was due on 8/1/23 but the Dow made its secondary high. Further along, this regular 29-day cycle was slated for a high on 8/15-16. Prices changed from sideways to lower, markets fell through into 8/24 reaching a mini panic (rule#1) “V” pivot.

Without assuming the low tide had bottomed early, the markets have rallied for their fifth day into the same into a low tide event like what happened on 8/1/23.  All that sets up as an inverted “V” high. Plus, and you can refer to MarketMap™ table of COT dates. There is a meaningful cluster from the last day of August to Wednesday 9/6/23, which the markets have advanced into.

The chart provided here points out a few added factors regarding what CT sees as a massive double top. One of the predominate ones is the Astro-event that was present at the ATH 1/4/22 occurred again on 8/13/23 just a few days after secondary high 8/1/23.

With other cycles suggesting a bear into 2024/25 this cycle points lower into June 2024. But more on the longer cycles in next issues of MarketMap™.

The key price level that the old school TAs will be focused on is the August 18 and 25 lows. It represents to them tested support. I would be looking for their sell stops in that area.

Old development but still true, Five percent of the NYSE members have forged the advance from the October 2022 lows.

The advance from the lows of 2022 and more recently the lows of March 2023 are characterized as narrowly based. So goes high tech and so goes the market. But they are not abstained from the seasonal influences.

If You like to use seasonal stats to finetune your investments and trading here is the good word from my friend at Stock Market Almanac.  They point out that,

“Since 1950, September has been the worst performing month of the year for DJIA, S&P 500, NASDAQ (since 1971), Russell 1000 and Russell 2000 (since 1979). “

The “S&P 500 has been down in six of the last nine Septembers. September gets no respite from positive pre-election year forces.

Also, “Recent substantial declines occurred following the terrorist attacks in 2001 (DJIA: –11.1%), 2002 (DJIA –12.4%), the collapse of Lehman Brothers in 2008 (DJIA: –6.0%), U.S. debt ceiling debacle in 2011 (DJIA –6.0%) and in 2022 (DJIA –8.8%).”

The Premier Risk Takers Market (click to enlarge)

I don’t mind repeating myself. I must not just for new members but to keep it fresh and in front of me. That is Bitcoin (BTC) is a bellwether for all risk markets. It is the BRAND for the first and best known crypto and provides a market for major risk takers. You have to be a player of size in the face of multiple1,000-dollar swings in a day or two and some periods larger.

I will also relate to everyone that BTC will make it back below 5k and I project below 1k before it’s all finished.

From here the key level the old school is focused on is 25k to be precise 24,760, the most recent low. As I go to press that level s being tested. Calling up the TEM study group in TradeStation™ (not shown here) the S-T set up backs a breakout here. TE#4 says play the break; in other words, a breakdown here will not be a head fake.

To receive the timing signals like the ones shown above, get the Trade Exchange app and see the push up alerts on your phone, one time none refundable $10 set up fee and $10 a month there after.

Nuˈvou bears have flipped already

What CT is looking for after the initial bear phase in 2022 is for the pace of the decline to quicken, traditionally the case in the middle leg of a cyclical bear market. Yet 2023 has been blemished by repressed volatility, like 2017.

NOTE: A reminder that traders prefer “volatility.” Not so much as the media uses the term as a euphemism of a bear market. As a breakout type of context where range breakouts get follow through, MA crosses are followed by a trend, where ranges expand. What is called “volatility breakouts,” to be proper.

While the VIX is called the fear index and is widely suggested to go up when the stock averages go down, the bear market of 2022 did not have the bouts of fear spiking as did declines of shorter time spans and less price damage, like 2011 and 2015.

The chart shown here is the equity curve of a long only Vx futures scalping system that excels when the VX futures spike. We can see how the low volatility backdrop has engaged the market at the end of 2021 and persists today. This is a context universally accepted as suitable for scalpers, market makers and deal desks, not so much for desk traders.

To make a point by an extreme example, too many managers are achieving above average returns by selling volatility short. They net what is referred to as “volatility risk premium.”

This is the institutional way of doing what large retail brokers and their clients were doing back in the late 1980s, when they were selling uncovered puts to achieve the same end.

These are reasons to be on guard for an extra-market event, an event which is not related to the US market or the economy that changes Wall Street’s attitude to risk and demonstrated by a long bar decline of greater than 4%.

True, “It’s no secret that risk assets like a weaker dollar!”

After the first down day they jumped on it.  “The DXY has finished in the green for six straight weeks and counting… I know it’s only Tuesday morning, but it’s not looking good for a seventh week of positive returns for King Dollar.”

For their rationale not itemized here they are bearish on the money they get paid with. However, their bearish outlook on the US Dollar index is only as strong as its weakest link.

While there are a few, and the USD has the most recent advance to consolidate here, the pound looks like it will be the next one to fall in its relationship to the green back.  more to follow…

This work by Jack Cahn is licensed under a Creative Commons Attribution-NonCommercial 4.0 International