Above The 40 – Another Sharp Panic Paves The Way For Fresh Buying

AT40 = 60.6% of stocks are trading above their respective 40-day moving averages (DMAs)
AT200 = 59.6% of stocks are trading above their respective 200DMAs
VIX = 11.4
Short-term Trading Call: cautiously bullish

Commentary
I call it a mini panic dip.

Political news roiled the stock market for a brief moment, a grand 30 minutes in total (it sure seems like these dips get shorter and shorter in duration!). The market was buffeted by the cross-currents of President Trump’s potentially deepening legal troubles (allegations which later led to clarifications, corrections, and a suspension) and the promise of tax reform winning the day in Congress. In the end, the buyers won as has been the case for a very long time. The S&P 500 (SPY) ended the day with a tiny fractional loss of 0.2%.

The S&P 500 (SPY) swooned for about 30 minutes. This 5-minute chart shows the sharpness and brevity of the selling.

By the close, the S&P 500 (SPY) erased almost all its losses and finished on TOP of its upper-Bollinger Band (BB).

The volatility index, the VIX, suffered one of its worst one-day fades in a long time. The temporary angst drove the VIX as high as 14.58 and a 29% gain. The VIX ended the day with a paltry 1.3% gain. Per the trading plan I outlined in the last Above the 40 post, I sold my latest tranche of call options on the ProShares Ultra VIX Short-Term Futures (UVXY). The trade was good for a little over a double. I am not sure yet what conditions will motivate me to pull the trigger yet again.

The volatility index, the VIX, is on an upswing but Friday’s massive fade may have deflated the momentum.

I read an interesting piece in Business Insider about a “mystery trader” who keeps rolling a massive bet on a spike in volatility. Apparently, the big bet started as a bet on a volatility spike by October. September and October were of course uncharacteristically calm and August absorbed all the big volatility hits instead. Apparently, the August move was not enough, and the trader rolled the position to a bet on a volatility spike by December. Now, the bet targets January. Business Insider relied on Bloomberg for this information.

I am intrigued by the configuration of the bet. The trader sold around 260,000 VIX January $12 puts to fund the purchase of a VIX January $15/25 call spread. The call spread has a ratio of 1:2 with 260,000 $15s and 520,000 $25s. This is a very intricate bet because the trader cannot afford to see volatility spike “too much” by the time s/he closes out the position. However, since the VIX last soared over 25 in June, 2016 with the Brexit vote, history is on the side of this trader. YET, if volatility remains in this period of extremely low volatility, the trader may have to accept a substantial loss…unless the position gets rolled again in time to avoid a major loss.