Thus far week #26 has played out exactly true to form in that it has remained flat as a pancake with a bit of obligatory but listless whipsaw in both directions. If we take a step back and look at the bigger picture it’s also not overly surprising to see things slowing down a bit after a two month long face ripping short squeeze that ended up demoralizing even the staunchest of beartards.
If there’s one thing I hate more than hospitals it’s wasting hours waiting at the hospital for no apparent reason. I’ll spare you the gory details but if you ever have the choice of departing this mortal coil or the Spanish healthcare system choose death without hesitation. Anyway, this post will be brief but direct in that it’s aimed at the collective silliness I keep encountering in the comment section.
We’ve almost made it through the seasonal summer solstice sell off, which it shall be known as henceforth since it has a nice ring to it. Week #26 puts us right into the middle of the year and true to form it’s a complete coin flip statistically speaking with a net zero Sharpe ratio and a 50% win/loss rate.
Since Monday equities have literally run a grand tour on our weekly expected move scale. With one session remaining the big question for most professional option traders today is whether or not we’re going to remain in range or if we’re going to close the week outside. The reason for that may not be apparent to most retail traders, so let me enlighten you.
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One of my long term readers decided to yank my chain a little yesterday by facetiously asking what this week’s expected move (EM) should have been for the SPX. Looking at the outlier moves we’ve seen lately it’s easy to assume that EM is a silly antiquated concept that should at best be ignored. Well I’m not at all sorry to say – you would be horribly wrong.
Welcome to the fourth most bearish week of the year, at least statistically speaking over the past 70 years. Seasonal bias has been touch and go over the past few years but it didn’t take a crystal ball to suspect that we’d be seeing some sort of correction during the onset of summer, and in particular after a record snap back rally that propelled us 1000 SPX handles in less than three months.
If you recall my Monday post then you probably remember that week #24 historically closes flat but can produce quick wipeouts typical to what we see in low participation summer tape. And just looking at my trusted Zero indicator signal yesterday made it crystal clear that the bots were running the session. Instead of relying on complex indicators or silly wave counts let’s instead look at what price is telling us.
If you’ve been following implied volatility as long as I have then you know that backwardation is incredibly uncommon in the VIX futures curve. For the uninitiated amongst you, a futures curve or futures term structure is produced by drawing a graph comprised of a time window snapshot of two or more futures contracts of an underlying asset, e.g. crude, gold, pork-bellies, or in this case the VIX.
I’m still split on whether I prefer winter over summer. Sure, summer brings you hot temperatures and pretty girls prancing around in skimpy skirts (and now Luis Vuitton face masks). But at the same time it’s the worst season by far for any financial analyst or blogger. Winter on the other hand equals earnings season with a bullish bias, the Santa Rally, holidays full of delicious goodies, plus it promises you skiing in powder filled alpine resorts. What’s not to like? Yes, I know – it’s so bloody cold!
All the civic chaos and social brinksmanship notwithstanding U.S. equities have brazenly continued to march higher and higher since the activation of the riot brigade. Much to the chagrin of a legion of political arsonists who would love nothing more than to see our entire nation go up in flames. Continue reading