Market Notes

I covered all my S&P shorts past Friday. Needless to say holding the shorts for the last four weeks turned out to be a profitable venture. Do I think the market is not going down from here? I did not say that. But the degree of confidence in market direction for short term has decreased. Meaning the market could continue its current rally. However for short term, I see some volatile swings in the offing and you have to have nerves to digest them especially if you have position trades open overnight. That said, there is still a good deal of confidence that trend is still down for long term at least for now. Why not take some profits off the table and play with the extras on other trades I feel more confident about? In fact I will cover one such trade in the next post following this one soon.

Going back to market direction, if oil keeps going lower and dollar keeps moving higher or even remains stable, this will add to the impetus the market needs to continue its rally from here on.

Good luck
Krish

Do "Increasing Volume" in Short ETFs Really Justify Lower VIX?

Recently there have been several articles that are trying to justify the relatively lower values in VIX with respect to calling market bottoms. One of the biggest reason thrown out there has been the "surging volume" in index ETF shorts. Examples - short ETFs from the Proshares Funds' ETFs - SDS, QID, SH, etc. aka ultrashort S&P, ultrashort QQQ, short S&P, etc. The argument is because these short ETFs are gaining popularity and volume, they are acting as a more known and well embraced hedge against the broader based portfolio. So far so good. But then it goes on to reason that this phenomenon has resulted in panic mitigation in equity stocks, which is what sentiment indicator like VIX tries to measure in a broader manner. Ergo, VIX is not flying at high values that you typically see at Market bottoms especially in the last one year.

I disagree. Why? The facts don't support the popular hypothesis. I went back to the last two intermediate bottoms (Jan 22 and March 17) and compared the volume of several short and ultra short ETFs with the volume in recent days including today when we saw something of a mini spike in VIX earlier in the morning. Let alone being significantly higher, the volume in these ETFs recently has been generally less than the previous two bottoms! I also looked at the average volume to ensure I was not focusing on too short a window and still it wouldn't confirm the fact that the average volume traded has been consistently increasing as compared to Jan and March bottoms.

Well a picture speaks a thousand words. So lets take the example of Ultrashort and Short ETFs for S&P and DOW offered by Proshares



The first figure above compares the total volume traded for Ultrashorts within three days of January 22 and March 17 with the Mid July timeframe. The blue bars represent SDS (Ultrashort S&P). The red bars represent DXD (Ultrashort Dow 30)

As I said, pictures speak volumes. Example a total of about 145 million SDS shares traded on Jan 18, 22 and 23, with Jan 22 being the midpoint of January bottom in Markets. A total of about 138 million SDS shares traded on March 14, 17, and 18, with March 18 being the midpoint of March bottom in Markets. And get this, a total of only about 127 million SDS shares have traded on July 11,14 and 15 when we saw the biggest spikes in VIX since the March bottom. Shouldn't the volume on July 11, 14 and 15 have traded higher not only because of the first big spike in VIX since March but also because of the claims that the volume in these ETFs is more than the time period around previous bottoms??

Here is another example with the simple (as opposed to ultra) shorts in S&P and DOW (SH and DOG respectively)



Again the figure compares the total volume traded within three days of Market bottoms in January and March with Mid July. The blue bars represent SH (Short S&P). The red bars represent DOG (Short DOW 30)

Again we see a similar picture. Example a total of about 2.68 million SH shares traded on Jan 18, 22 and 23. A total of about 1.96 million SH shares traded on March 14, 17, and 18. A total of 1.90 million SH shares have traded on July 11,14 and 15.

Conclusion: The panic spike is yet to come unless the obscenely ginormous manipulative power of Feds was successful in the last three days. Which wouldn't make sense because the Fed had more tools back in Jan and March and they still could not prevent the VIX spikes.

Keep in mind we may see a spike as early as tomorrow or as late as August. But based on the above analysis, I am inclined to conclude we have yet to see it.

good luck
Krish

Still No Time To Be A Hero

Our strategy to remain on sidelines and short the cheaper index puts or buying index ETF shorts keeps on giving! If it wasn't for the enormous amount of government intervention in the last few days, what transpired with the banks, Freddie and Fannie came very close to getting stripped and receiving a kazillion lashes. And there are people who say we are in a free market country. What a joke! I don't know how many times I have uttered those three words in the last one week. Its not even funny anymore.

Only hindsight will tell if the intervention was a brilliant move or a kick in the face of the already fragile economy. I am one of those who believes we may benefit short term but the inevitable financial massacre has just been pushed to a later date and may contribute to an overall Black Swan incident. I hope I am wrong. But for now I am waiting for a bottom, not anticipating ..just waiting. I will start anticipating when I get my sentiment indicators high enough. With all due respects, am not stupid or stupidly rich enough to be a hero.

As I have said in the previous posts, I have taken half off my index puts or index shorts for profits and am letting the other half ride. I am STILL NOT opening any new long positions. But I will start studying and researching companies for some nice new long positions this week. The source energy aka God aka the Force aka the High aka the Feeling-You-Get-When-You-Put-A-Swab-In-Your-Itchy-Ear orchestrates such boring, mundane, drawling, slow-motion-train-wrecking and gut wrenching times for a reason - So that we can sit back on a lazy Tuesday evening and ask ourselves - while chickens are running with their heads cut off, what sweet stock/option is going to deserve my well deserved mint for the next couple of months?

Good luck
Krish

The Week of Reckoning

I had some market index shorts in the form of S&P puts open since the last few weeks as mentioned before in this blog. I had anticipated the market fall and the strategy worked out well. While my long portfolio was water tortured by Mother Market, thankfully due to the shorts, I didn't fall off the cliff. I will be covering my shorts this week. So that you know. My theory is - although the bloodbath has continued, the final reckoning I am awaiting for should happen this week. Expect major spikes in VIX and/or a panic sell-off this week. There is no other way except for this grand climax. Just in case it doesn't happen due to some stupid reason like interventions, I want to book my profits while I am still very sure about my shorts. Besides, the level of speculation would increase to a degree that would be too uncomfortable for me to continue betting on the short side until the indicators become slightly less oversold or we continue on the next leg down. For now though, I am going in for the kill and I will be ready on the other side.

The google trends indicator mentioned couple of posts ago in combination with the VIX study and other indicators reflecting institutional participation or lack thereof, worked out really well allowing me to not to sway with the talking heads who have been calling a bottom since the last twenty sessions. Yeah..same sessions marking the market's continued obscene decline.

A great post from Dr Bret Steenbarger published today resonated with me. Dr Steenbarger surmises that by tracking certain sectors' ETFs you can get a good idea of whether the market is in a recessionary/risk-averse mode or recovery mode. The former would pursuade the participants to move to defensive stocks like consumer staples. The latter would encourage the participants to move to stocks that have been battered off late such as financial stocks. If my theory about the week of reckoning is correct, then in addition to watching for a panic sell off, I like Doc's idea to study the sectors to understand if we have truly come on the other side. If so, I may be interested in getting long some of the financial stocks later this week or early next week.

Good luck
Krish Rathi

Lack of Fear (you read it here first!)

About a week and a half ago, I surmised how lack of fear is indicating the markets have still ways to go down using Google Trends indicator. While we saw that prediction unfold, many writers in financial publications and blogosphere also started talking about VIX and its inherent complacency off late.

Moving on, the markets remain in extreme oversold condition, and yet VIX remains stubbornly complacent. Even the google trends indicator discussed last week has remained flat to down. However lets not forget the seasonality. With the summer going on and lot of people taking off on vacations, the following of the markets and participation in them tend to thin down a bit. So a skeptic of VIX indicator might argue if there are not enough people, who is going to panic? On the other hand, a record outflow of money from Funds have been reported last week. So there is certain amount of wariness to keep money invested in the Equities.

I remain on sidelines. Anticipating the recent sell off, I had scooped up a few S&P puts in my personal portfolio that kept me from falling off the cliff in the recent bad days. You may want to buy some puts too as a hedge protection should the markets try to make another go at the trajectory down. These usually can be slightly pricier in this kind of a market as opposed to buying slightly out-of-money VIX options one or two months away. If you are not an options trader and more of a stocks investor/trader, then there are several ultra short ETFs to pick from as a good hedge.