With equities not just reaching but far exceeding stratospheric levels the question of how much longer this can be sustained obviously comes to mind. In fact it’s the prevailing sentiment in light of a face ripping rally that is unparalleled in financial history. I have repeatedly pointed out the obvious disconnect between the stock market and what has transpired across Main Street. Not just all over the United States but also in the rest of the Western hemisphere, which continues to be on the receiving end of various well intended policy decisions.

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In my Monday post we took a snapshot of the short to medium term risk perception courtesy of the VX futures term structure and compared it with the one we saw in November. What we discovered was that implied volatility (and thus risk perception) has steadily dropped lower but that the steep contango had remained intact. Thus my suggesting a chronic manic depressive marketplace, which I find rather appropriate given that equities are not just trading at all time highs but are now pushing into ever loftier heights every single session.

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Over the past decade of Fed fueled monetary extravaganza a ramp and camp formation has become the norm rather than the rare exception. The Monday short squeeze that officially cemented a new S&P milestone above the $4k mark has pushed us to new stratospheric valuations, and it stands in stark contrast to the worldwide economic situation in which we currently find ourselves. Not to mention the one we are heading straight into. Let me assure you that a global silicon shortage affecting chip production across a wide swath of industries is merely the tip of the iceberg. There’s a lot more fun to come.

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I looked at the VX futures term structure this morning, i.e. the series of VX futures contracts from now into late this year, and something occurred to me. For over six months now I have been plotting various changes in this curve in exhausting detail and the story it’s been telling us has remained largely identical. Big trouble ahead! So how come the market continues to push higher and higher with the SPX officially marking new all time highs as well as reaching the coveted $4,000 mark?

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If this market has proven anything to us then by now then it is that it wants to go up up up, and then up some more. Which of course makes absolutely no sense given that we are still battling a worldwide viral epidemic which, among many other aspects of our lives, has wiped out a huge swath of our global economies. However having the benefit of following the market’s gyration for over 20 years now I’ve long learned that what makes common sense – at least according to the basic rules of economics –  unfortunately very has little to do with actually happens in the financial markets. For this is war and if this game was easy then everyone would be winner. But the opposite is true of course.

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Last week turned into a complete and utter roller coaster which traversed not only the entire weekly expected move but did so in both directions. Moves like these usually serve to confuse the average retail participant but they often present unique profit opportunities to savvy option traders. In fact what transpired once again confirms what I have been preaching here over the past year as well as the trading approach I outlined in my RPQ options courses.

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None of the above are actually happening, but I sent out a feel good newsletter with a hopeful premise for the future yesterday and a bunch of folks were actually wondering if my account had been hacked. ‘Who are you and what have you done with the Mole?!!’  So I just wanted to assure you that I’m alive and well and not chained up in some rat infested dungeon. Guess I won’t be making that mistake again! Anyway, now back to our regularly scheduled programming:

Honestly I can’t think of anything overly insightful to share about the current market as we seem to be treading water. The tape for sure ‘feels’ bearish but there’s always that JIT stick-save that draws us away from any hurdle that may impose excessive gamma risk.

On a more long term basis the one thing that stands out is the fact that the IV Z-Score continues to drop and no matter what happens in the bonds, in big tech, the Dollar, or anywhere else financials continue to hold this market.

Speaking of big tech – yup it’s looking pretty droopy and the mini bear is in sight at least until the NDX manages to breach back above the 13,400 mark. However that said – nothing truly bearish happens until 12,200 is being taken out.

The VIX also seems to have petered out near the 20 mark now. I have to say that this is a positive sign and obviously there are now two avenues in front of us:

  • We hold here for now and we option traders take advantage of the biggest IV buying opportunity of the year.
  • We drop below the 20 mark and stay there for the foreseeable future. Which would mean we just completed a small sideways correction and it’s even higher equities moving forward.

I guess whatever was done to alleviate the impending crisis in the interest rate swap market has been addressed as the long wick extending to 91.37 looks like an exhaustion spike to me.

Now let’s look at what’s happening in the bonds, currencies, and even on the crypto side:

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The durable goods report for February came out this morning and thinking linearly – as usual – mainstream analysts expected positive growth to follow that of the previous 9 months. Unfortunately reality stomped on that little phantasy as it turned out to be a tumble instead of small gain which had to be the general consensus (LOL). Strangely it appears that locking down half of the economy and putting large swaths of people out of business will come at a price sooner or later.

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A subscriber who bought my Options 201 course wrote me today asking for some clarification on how to best stack your weekly butterflies. There were four aspects to his inquiry, namely: 1) which expiration to choose on which days of the week 2) how to distribute your exposure 3) deciding directional bias and 4) structuring ones trade based on the current IV environment. Let’s tackle these questions one by one:

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I received a few emails asking about my posting schedule this week, and clearly it was from people who had not seen the heads up I posted last Sunday. So, just to ease everyone’s mind and to stave off further inquiries here’s the elevator version of what’s going on: I had eye surgery yesterday (acquired strabismus) which prevented me from putting up a post. Everything appears to have gone well, meaning I can still see with my left eye but my face looks like as if I just went three rounds with Lennox Lewis. And that’s pretty much how I feel as well, meaning I’m still a bit out of it.

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