I was speaking with an astute RIA last week and he told me that he's always been an optimistic guy but the financial crisis changed his perception of risk. He's not alone -- anyone who has attempted to manage risk since 2009 cost themselves money (by and large; I understand there were "risk off" periods, however brief).
It's one thing to fight the tape and lose; it's another to participate, underperform, and be held to task, which is what we're seeing in spades.
Taking a step back and removing emotion, there are signs lining up that we're getting close to a turn.
The S&P (INDEXSP:.INX) price target that we've been monitoring since February is a stone's throw away.
The VXO (INDEXCBOE:VXO) (volatility/fear index) is a whisper away from an all-time low.
Sentiment is skewed to levels last seen in 2007.
Heck, even the Smart Money Index, which hasn't been very smart the last month, remains historically wide, albeit better than it was.
So what will be the telling sign? One possibility is that the Fed (or a foreign central bank) does something dovish and the market sells off. Given how interdependent the world has become -- or co-dependent, as the case may be -- it would seem to me that a marked shift in the reaction to news, if and when that happens, would be a pretty decent alarm that psychology is shifting.
The Vexing VXO Signal
I wrote a post on Friday regarding the near-historic reading in the VXO, which I also shared on Twitter (NYSE:TWTR). This blog post (text below) was written, along with some pertinent statistics about what that might mean for this coming week.
With the VXO closing at 9.14 (at the time of writing) below are the prior weekly closings below 10 and the next week trading odds for $VXO cash index.
P.S. You really can't trade VXO, as there is no derivative for it, and we don't have a simple relationship, like y= a*x+b or something like that to tell the likely odds for any other tradable derivative, but it's good to know.
% Winners: 100%
Average Change %: 17.87
Median Change %: 10.85
Maximum Gain %: 51.30
Maximum Loss %: 5.59
Average Gain % for Winner: 17.87
Below are the trading odds for SPY (NYSEARCA:SPY) longs, from Friday's weekly close to next Friday's weekly close, whenever VXO closes in single digits, since 1993.
% Winners: 0%
Average Change %: -0.82
Median Change %: -0.54
Maximum Gain %: -0.05
Maximum Loss %: -1.90
Below is the table with the historical details of VXO weekly single-digit closings since 1993.
VXO single-digit weekly closings since 1993:
The following was an email I received this weekend from an old-school Minyanville reader:
I came to Dubai in July 1980 and worked in Middle East thru 1997. I came to Kurdistan, Iraq a couple of times in 2012 and from Feb 1, 2013 to Dec 15, 2013. I am back here now, since Feb 1, 2014. I have a company over here. IMHO, the Kurds are done with Baghdad. This situation is a golden opportunity for them and I expect them to take advantage of it as they have done territory-wise already. The Peshmerga (Kurd Army) are rough and tough and aren't scared of anybody. This Iraq WILL break into 3 (or more) parts. My 2 cents....
I will draw your attention to China as it approaches the all-important SHCOMP 1985 level (it closed last night at SHCOMP 2024). How much this will matter remains to be seen given the non-correlation between that market and the stateside tape. Since its high in August 2009, Shanghai is down 42% vs. a 96% gain in the S&P over the same span. That's a far cry from the conventional wisdom that used to view China as the growth engine of the world.
- Crude $105 remains a bovine backstop.
Deutsche Bank (NYSE:DB) is down 30% from its January high; $35 is the next important price point.
We don't "do" advice in Minyanville but I will make an exception here: you should most certainly watch this.
I've been writing about the financial markets in real time for 15 straight years; that's almost one-third of my entire life.
Expiration hangovers may cloud the price action for the first few hours today.
One day we'll look back at this and it will all seem funny. I agree, Boss.
- Good luck today; there will never be another June 23, 2014 again so let's make it count.
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Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at firstname.lastname@example.org.
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