Happy New Year to all the Option Pit faithful! We started off with more of what we saw last year; the inability of VIX to hold a spike and then yet another rally. Not so long ago naysayers thought we would never see the highs again in the NASDAQ and yet it pushed through 7000 today for an all-time high. Whatever VIX thought was going to happen, it was right, just not in the direction implied by the sharp rally.
My best trade idea was early in the week with the SPY/QQQ pair. After talking with Mark we think the big end of year tech rebalance is over so that idea could have some legs as that sector recovers. Congress could still provide some fireworks as Dec 15 looms but nothing is really sinking the market for stocks. Maybe all the volatility is going to Bitcoin (BTC) so that could be a dampener. After all BTC is worth more than WMT so we got that going.
Stocks are stuck to the vicissitudes of Congress until the recess on Dec 15th. I don’t see how much can propel us higher or to touch the ATH’s we reached earlier on Monday. The nagging bid for Treasuries is a bit disconcerting as well. Today we had the ultimate “What the Hell!” signal out of SPX, meaning VIX down, SPX down.
Fake news, real news, no news, blue news… it appears that we have had a lot of flip flopping and flat out surprises on news stories lately from the failure of the tax bill to the miraculous resurrection of the same. SPX found a way to trade to ATH briefly today but the NDX has not been so fortunate of late. Granted the rally in 2017 has been spectacular for NDX.
Tech is still where it’s at with most of the big names reporting earnings beats. Even lowly TWTR managed to squeak out a big move up now that profitability looks much more likely. Long term IV is still cheap in there. Evaluating volatility and position structure is a learned skill and that is what we teach in our Gold Course.
For a few moments today VIX went backward and traders decided to worry about a tax plan, ECB rate hikes, FANG earnings and whatever else ails a screaming stock market all at once. I don’t see many backward to VIX cash markets at 13 VIX but we had one today. Usually VIX traders have a reason to let VIX cash fly.
Not so quietly GE has fallen from the low 30’s into the low 20’s with SPX and INDU making all-time highs. Massive asset sales could be on the block and the equally massive 4.4% TTM dividend could be on the block too. I think most of the weakness in GE is centered on those issues. Option Pit is giving a free credit spread webinar tonight so this is an inkling of that. And no GE will not be the topic.
The 3 day rule
No, I did not invent the 3 day rule, but I like it. In the old days a stock that went up 3 days in a row was susceptible to a pullback. The 90’s put the rule on hold and QE messed with it as well. Basically it is the old tape readers logic that 3 days in one direction is not sustainable. With equity prices it is not a bad swing run timing thing, but it works very well for volatility, QE be damned.
There was a time not too long ago where any hint of Euro disunity caused big ripples in the markets. We had the Greek elections and debt crisis and MF Global blew out on what turned out to be a good bet long PIGS debt. Spain is having a mini-crisis around the Catalan state leaving and US markets mostly shrugged.