Weekend Update

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Serious markets ripped up all ordinary plans. Pull backs occurred on Wednesday and Thursday, but they didn’t pull too far.  By Friday, The SPX held firm above 1500, the RUT consolidated above 900, and the Dow Jones Industrial Average broke 1400. All week, I anticipated a pull back. Everyday I was wrong. But market assumptions provide only but crucially a lens through which one perceives market events. One must assume that what one thinks could well be wrong. Meditate and adjust. Do so easily.

Looking forward, we can see that the SPX should go to 1525 to reach its target price from November lows. Anxieties or premonitions about reversals probably stalled the market’s upper progress.  But solid pressure forces bears out, and the price is free to drift to its reversal points. Reversals, however, do not imply anything except a logical point for those who have held from mid-November to unload.

In the meantime, we must always remember who is control of this market:

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Purchases continue through the month without one scheduled sell day. The banks will be taking their cuts, and the market should be primed for more upside.

The options market confirms this. The question is now being asked everywhere: Is volatility dead? Experienced hands recall trading iron condors in 10-12 VIX volatility environments in 2005-2007 with success.

Vol differentials are always relative. My back tests in calendar or time-spreads has shown that during 2006, monthly calendars returned 100+% on risk. Likewise, in 2009 when the VIX was at its highest and trending down, Butterflies returned 100+% on risk. Thus, in this current VIX environment, long volatility plays are the tactic of choice.

Long Vega, long Delta, and long Theta are key to any position; at the same time, one can hedge volatility risk with butterfly spreads.  Aside from the difficulty of unwinding more complex spreads, such “North/South” tactics may work even better than time spreads alone.  More testing is required.

bones

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