Despite S&P VIX May Have Topped out Friday...plus 5 BOLD Predictions
It’s about 8 PM Sunday night and the S&P 500 E-Mini futures are off about 25 points:
Not exactly the cataclysmic sell off the Sunday talk shows spoke of based on the downgrade of US debt by S&P. Given how much the news of the S&P downgrade of US debt has made one might have expected the market to drop by 5-10%. The reason might have to do with what happened on Friday. Like it or not, the smart money found out about this move by early Friday. At that point anyone who wanted to unload US equities…did. That is why we saw a 'premium run' on Friday mid-day (you can see that pop in this chart).
Around 11:30 AM EST we saw the S&P 500 quickly sell of about 25 points or so trading briefly breaking below S&P technical levels of 1175. During that time there was a MAJOR spike in VIX as traders went scrambling for options on the S&P 500 in one of the quickest pop in volatility I have ever seen. The day before the S&P 500 had been down 60, the VIX rallied about 9%, on Friday with the SPX down less than half of that the VIX popped more than 6.5% in only a few minutes. A pop like this can only be called a run; trader would basically pay anything for puts…for around 10 minutes. That pop likely signaled a top in VIX, even with the downgrade tomorrow.
When I was previously calling a top in VIX at 25.80 (I was early) I jumped the Gun because I assume that the big VIX range of more than 3% on 8/1 met my checklist rule number 1 (a day with a huge range in VIX in which it Pops then drops). I was too aggressive with that and will no longer accept days with a range less than 4.5% when making this type of call.
The crazy range we saw in VIX on Friday, along with full backwardation in the futures makes me think that without some NEW really bad news, there is no way the VIX breaks 37% tomorrow and holds it (I will add the caveat that in the first 30 minutes while the market is figuring itself out, we might break 37).
In fact, looking at the way futures are reacting: I think there is a strong chance that the market ends up on the day tomorrow as the regular investment houses move to buy stocks. Why? While the S&P 500 news is the headline everyone is watching, the truth is, the ECB buying bonds is FAR more important than any S&P 500 downgrade.
So the big market predictions I promised:
1. 50/50 chance of UP on the day tomorrow
2. 75/25 chance of UP on the week
3. 90/10 chance the VIX topped out last Friday
4. 95% chance Bonds are lower in a month 100% chance they are MUCH lower in 6 months
5. 0% chance that this doesn’t become political fodder and a bit of joke with in 1 month
6. 100% chance that if I am wrong I don’t talk about this post too much
Trading It:
I am a bear of Volatility at this point, but my strongest conviction is to sell US debt. Equities, I like them around 1170. Here is why: we are selling off one asset based on the downgrade of another asset...Fine...but we are going to use the cash produced from the sale of asset one, to buy asset two??? That is the part that escapes me. I would say this is bad for the dollar, but what else would traders buy? Gold and Silver? Buy the asset, sell the volatility, both are overpriced, but one more so than the other.
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