Saturday, October 12, 2013

The Cow Has Been Milked

Last week played out nearly to a tee for me.  Perfection would have been the rally coming one day earlier.  I knew this because volatility levels told me so.  As I wrote last week, we are in for a four to six week period of higher volatility, per my weekly trade signals, but we needed to relieve an expected, extremely overbought level first. A 20% drop did the trick.  Vol may drift a little lower as the last of the wrong way bets are unwound, but then expect a strong move higher in volatility.

Bob, how can you possibly know this?  I have help.  They are IBB and CME.  We are now getting nearly daily announcements of margin increases, and these increases are coming because margin levels are at historically high levels and this last bout of volatility forced them to reevaluate value at risk, ergo margin increases to match expected higher levels of volatility.

Just like Fed rate moves, and eating potato chips, you don't get one or a few.  They keep coming, and they start to form their own weather.  Higher margins cause higher selling, which causes higher desire for protection, which causes higher volatility, which causes, ok you get the picture.

We are also near the point of a singularity called the Sornette bubble.  It is a fractal based calculation that measures the point of exhaustion in a bubble.  That chart (shown below, reproduced from Dr. Hussman's newsletter in September) shows a blowoff by Mid November at about 1850 on the SPY.  Ironically, I calculated the same number six months ago (ad posted on my blog) by extrapolating out the correlation between the Fed asset growth level one year forward  with SPY price growth.  We are also reaching a singularity of of money velocity and bank reserves.  QE has the effect of driving velocity toward zero.  That obviously can't be allowed to happen, as the economy will collapse.

So, if you are a trader continue to play your small ball and ride the waves.  If you are a Momo chaser, take a vacation, you are being targeted, and if you are an investor thank God for this latest melt up and get out for awhile.

For me, I had a fantastic week shorting gold and volatility, and am now pretty lite.  For next week, I am short gold, crude, emerging markets and banks (all November OTM puts) and will re short with TQQQ November puts next week.  Have a great trading week.

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  1. Bob, if you think the SPX may run up to 1850 by next month, why would you be advising folks to get out now?

    1. Because, like silver in 2011, you do not know when the trap door swings open, on a Sunday night, when you cannot get out. These margin increases are going to start to bite, soon. Plus this is horseshoes not archery. We could have had it on Friday, or by next week. In my view, we are close enough to sound the alarm.

  2. FWIW, we are on the very same page here.....................