BUY DIPS!

As the S&P 500 hit new highs again, at this point, that backspread strategy made a lot of sense. It has allowed me to be wrong, but right anyway.

I keep thinking I have stumbled into some parallel universe where normal market behaviour has been suspended and any news sends the market higher. Good News is obviously good news. Bad news, is also apparently good news. A slowing economy is bullish.

Shades of Animal House.

VIX Deceased

I have mentioned in earlier posts that I have stopped looking at leading indicators such as put/call ratios, VIX etc as they stopped making any sense, sans any sort of normal wave structure in the stock indicies.

Only one thing made sense - buy dips; not retracements, they don't exist anymore, dips. Any dip!

Old habits die hard, so today I once again perused the VIX for any sign of activity, to find that, ironically, it slipped away in the night, unnoticed by anyone.

Anyway, nobody needs me to tell them that S&P 500 IV's are at basically their minimum value. We have not seems them much lower... ever. Adam Warner has discussed VIX at length over at The Daily Options Report, so have a look there for a comprehensive run-down.

Minimum value is a concept I like to use in the commodities markets. When cocoa producers start burning there crops in the streets as they did a few years ago in the Ivory Coast, it's time to take a position.

So can that logic be extended to stock market volatilities? I think so, but cautiously so, as all logic has apparently been suspended. Buying cheap volatility, of course means buying puts, because it is from downside where we will get a lift in vols.

Hmmm well there is that potential double/triple top.... the election is past.... the bears are looking a bit more credible.

However, the bobbleheads are talking up a storm (as ever), oil refuses to rise despite my best analysis, and apparently a slowing economy (and therefore a pause) is bullish!

Confounding!

There is a strategy that suits low volatilities, is long vega on the downside and can be profitable even if the SP goes up - the "reverse ratio spread" (aka "put backspread"). We short ITM puts and buy OTM puts in a ratio (usually 2:1 but can be any ratio... 3:2, 3:1 whatever)

The risk is similar to a long straddle and maximum loss is at the bought strike.

I'll talk more about this in the coming days as we watch how this market shapes up.

More on the S&P 500

Dare we call it a top?

I stopped looking at leading indicators on the SP about 6 weeks ago, once I twigged there was a US election approaching.... indeed, I stopped looking at any sort of indicator at all. The only strategy that was working was:

Buy Dips!! lol

But the technical pattern I mentioned in the previous post is not being lost on the rest of the trading community either (Well of couse not! Sharp as tacks all you lot :) )

I was going to post some charts and analysis on the SP, but it has already been done in exemplary fashion by other bloggers such as Trader Mike. Rather than repeating that in my own words, best to go to Mike's blog where he asks this question - Can You Say Distribution? - and discusses exactly what we've all been thinking.

With the political imperative for a rising stock market now passed, it will be interesting from an analysis point of view, to see what happens next.

Put options are cheap too, and long vega is an attractive proposition, should a correction be in the cards.

It Can't Be True; Can It?

Looking at the S&P500 this afternoon, I could swear that I'm seeing some resistance at 1394-95 (on the futures). That not possible, is it. That couldn't be a double top in the process of revealing itself, could it.

I mean, this Stock market has slain the bears, humiliated all but the most stubborn of them into a morose subserviance. This market is going up forever, without ever having to worry about retracements ever again, with VIX gang-nailed to the floor

Well that's how it was looking up till the election... oh crap! That's my cynicism coming out again.

I'll have a look at indicies over the coming days for some signs of normality, maybe even dust off my bear suit. lol