Wed October 17 2012
Today's reading assignment is page C4 of the WSJ.
The market survived an important test yesterday and our internal indicators turned up.
Looking at the chart, what is really happening is that the market has transitioned to a higher range trading zone. From May to August this indicator bounced from 45-65. Since August 1 it has bounced from 67.5 - 82.5, that high being a very brief one.
A record 6.2 million VIX contracts are outstanding. Of course for every buyer there is a seller but the aritcle glosses over that reality. But the idea seems to be that there are lots of bets that the VIX will go to 20,25, or even higher by mid November. Therefore I seriously doubt that will happen.
TLT finally retreated from its downtrend line dropping over 1% yesterday. But the strength of its followers is impressive. Now that my October puts on TLT are kaput it may well fall below its 200 day MA.
As one trader to successfully exit at the top. As one manager notes in the VIX article, the market 'has had a termendous run but there are a lot of question marks out there.' it seems unlikely that bond investors will be rewarded in their Safe Harbor position.
To be clear we suspect it will take an incrediblynimble to add here adn then exit. Take a look at this long term weekly chart to see why.
That top occurred October 8, 2007 at 1576. The marekt is 122 SPX points below that high now. And it occurred in this same Fall time frame. Let's hop in our time machine and go back for a closer look.
Then as now the market bottomed in August and then zoomed, literally, some 200 spx points from 1380 to 1576, roughly, in less than two months. SPX then immediately collapsed 80 points, made a secondary lower high and that was it.
Most investing letters and for that matter the talking heads on CNBC, FoxB, etc, never talk about personal risk tolerance. Most of us have day jobs, we don't sit at a computer monitor watching the market all day long. I just received an inquiry from a reader about what I thought was going to happen.
I would guess that we have a repeat of this same sort of activity. By the way note that the whole move in 2007 was up and then down in three months. That is hardly buy and hold long term investor John Templeton Warrne buffet activity. That is what I mean by nimble. That is why I observed that it is easy to sell on an upday in relative calm. It is much tougher as volatility increases. What is your tolerance for risk? Which is to say that unless you are clever enough to jump in and out in a 90 day trading period you are not likely to be rewarded here. It may be that the better course of action for most people is to scale in bets on HDGE withh pre determined buy limits as the market moves higher.
Mr. Market has more than doubled from roughly 700 to 1450. This would be a good time to decide if the ability to catch that last 100 points falls in your risk tolerance, gee are we having fun yet, I am smarter than the traders on the floor of the CBOE, acquired skill set. Actully if you can do that, you are probably wasting your time in your day job and you should be a trader on the CBOE floor....
And by the way there is no assurance Mr. Market will go to 1576 again.
We will attempt to be of help here at TMP but at the end of the day it is your money at risk.