I took profits on my GLD and TLT call debit spreads, since I think gold and treasuries may be a little over done at this point. See profits with purchase dates below:
I’m waiting for SPY to sell off and VIX to pop after this mid-morning buying spree in stocks.
In the futures market, the S&P 500 was up 50 basis points overnight just before 6 am this morning.
As of this writing this the S&P 500 futures have tanked precipitously. At 8:10 a.m. the S&P 500 futures are down 45 basis points, almost a full 100 basis point swing from just two hours ago.
Bond prices continue to rise today. The 10-year T-note Futures are up 50 basis points this morning driving expected yields down as central banks across the globe continue to implement easy money policies.
Yesterday, it appeared that China was letting their foot off the gas. However, their currency is devalued again today. After dropping slightly yesterday, the USD/Yuan exchange rate is up 34 basis points.
The concern is if China doesn’t have control over the currency. As I mentioned the other day, if China loses control over their currency it could be very bad for global markets.
Based off the futures behavior in the past two hours, and the volatility index spiking up 9% off of its morning lows from just a few hours ago, this could be an interesting day in the market with more selling to come.
I’m not sure what’s going on in the market at the moment but it seems like investors are dumping risk assets.
Money seems to be piling into bonds at the moment.
Also money is piling into commodities. Gold is up 1.62% from the prior day. gold continues to Rally in the face of easy monetary policies engaged by the central banks across the globe.
According to a report from Bloomberg, global easing is picking up pace as New Zealand shocked the market with a bigger rate cut than expected.
New Zealand’s Central Bank reduced its cash rate by 50 basis points. New Zealand Reserve Bank Governor Adrian Orr didn’t rule out negative interest rates to help prop up inflation.
This cut by New Zealand mirrors what’s been going on in Europe, Japan, and what will be coming in the United States in the near future.
Interest rates are getting cut. They’re going to get caught big. They’re going to go negative. This is going to have a significant impact on the bonds in commodity markets especially.
Keep an eye on GOLD and TLT today to see what the market is pricing in. Check out the article I wrote about on game theory and the markets, and why you should pay attention to not only equities, buy bonds and commodities as well.
VIX looks to be declining, based on today’s market action. We saw a lower high on VIX, and the low came very close to the previous day’s low.
There is still risk in the market. If VIX makes a sharp downside move, then I would consider the risk to be coming down in the market.
There was no indication of a rise or drop per SPY chart patterns. We have a higher low. However, the high today was also lower than yesterday’s high. This needs to break before I would feel more comfortable going long.
Watch VIX and see how the price action behaves vs. the SPY. If VIX is hanging still while SPY is rallying, I would be very skeptical of the rally in SPY.
A VIX crush would indicate that fears in the markets have been subdued for the time being.
Also watch treasuries and IWM in the coming days. If IWM lags ahead of SPY, it could be an indicator of more selling off. Treasuries will give you and idea of (1) what kind of future rate cuts bond investors are pricing in (bond prices go up, yields go down) and (2) an opposite (bond prices down, yields up) move would be indicative of China selling off treasuries as part of this trade spat.
We’re in the middle of a nasty trade war.
The US Treasury accused China of manipulating their currency. If they are manipulating their currency, then you should be less concerned. If China isn’t manipulating their currency, then that is a sign of weakness in their economy if they can no longer control their currency, which could have a ripple affect across the globe.
I believe that China is worse off economically than they are leading on, and this trade war is making the situation worse for them.
China could retaliate against US tariffs with more measure of their own.
There’s also the wild card of what President Trump decides to do next too.
Volatility is already sitting at a high level, and it wouldn’t take much to blast it off through the stratosphere.
The more uncertainty there is in the market, the harder it becomes to price assets.
Investors are faced with a lot of uncertainty, which is why markets have been sputtering for 18 months now.
There’s uncertainty about the global economy, interest rates, the China trade war, other trade wars across the world, and debt to GDP levels for those biggest countries in the world.
This uncertainty makes markets harder to price, and creates the potential for big sell offs followed by big buy rallies.
As of 2:20 pm, at the time of this writing, the SPY is up 1.2% and IWM is up 0.5%, with VIX down 16.7%.
Yesterday I made a post about how I expected a rally off of the sell off that took place in the market.
The rally has been quite strong today, and I think it could continue into tomorrow as well.
SPY and IWM were heavily sold off yesterday. If you use RSI, you can see that it was entering heavily oversold territory on the intraday charts.
Markets tend to rebound off of big moves, and yesterday was a large gap down and a slow bleed off throughout the rest of the day.
Today’s rally was a relief rally, or an opportunity for investors to take a breather and see where we go from here.
I don’t think so. I think the market will continue to move lower over the next few weeks, with whipsaw days occurring during that time period.
If you’re a day trader or a swing trader, you could find some opportunities in long positions, as long as you keep your stop loss exits pretty strict. If you’re looking for good long-term investments, this isn’t the dip to buy quite yet.
I thought it was possible, given the news about the US accusing China of currency manipulation, coupled with the futures selling off 1.5% in the opening minutes yesterday evening. However, the futures markets quickly rebounded off those lows, and a test of these locals didn’t seem likely today.
I do still believe there is the potential for volatility to explode given the political backdrop. Tariffs, trade negotiations, Yuan devaluation, dumping of treasuries by China, and their ripple effects all pose a risk for this market right now. VIX could explode. If you play a volatility play, keep it very small (NNT’s barbell approach).
Fact: According to the Chicago Board Options Exchange (CBOE), only 10% of option contracts are exercised. That does NOT mean 90% of options contracts then expire worthless.
Instead, the CBOE reports that 55% to 60% of options contracts are closed out prior to expiration. This changes everything. Whether those options are closed out for a gain or a loss isn’t know, but it shows that 90% of options do not, in fact, expire worthless.
More numbers, per the Options Clearning Corporation (OCC):
According to historical OCC statistics for the year 2015 (for activity in customer and firm accounts), the breakdown is as follows:
Position closed by selling the option: 71.3%
Exercised: 7.0%
Held and allowed to expire worthless: 21.7%
So you can see the even MORE positions are closed out per the OCC.
Selling options isn’t inherently better than buying options.
This is what options sellers tell traders.
They say selling options is a game of probabilities. They say that IV is higher than realized volatility, and for this reason options are overvalued.
This is wrong. Options is a numbers game. It’s a game of probabilities but also a game of odds.
This is what options sellers miss when they tell you option buying is a losers game.
If you know the odds, you can win very big buying options. But you have to hedge and know what your odds of winning and losing are.
Play the odds, not the probabilities.
The volatility explosion scenario is looking likely, with futures down 1.2% in the opening minutes of the overnight session. Watch VIX.
Today’s day in the market wasn’t only crazy, but I called it last Friday.
Shall we revisit?
As I mentioned earlier, I expect IWM to pullback 5-7% since it broke the $153.50 support level earlier today.
IWM was down 3.71% today alone. Look at the support levels I nailed on this call here:
Once IWM broke below $1541, it hovered there for a bried time before selling off today.
SPY is a little trickier for me. It tends to whipsaw in price when volatility picks up, possibly due to algorithmic and HF trading. I think we see SPY revisit $285 range before the end of next week (Aug 9 expiry), but it’ll be a rocky ride.
SPY visited $285 today. Completely unexpected by me. I thought it would take a while to drag the SPY down given how well it’s performed relative to the rest of the market.
There was a huge gap down on SPY this morning and we finished down 3.59% today.
I think VIX will also whipsaw next week, seeing a range with a low 14.7 and all the way up to 23.5. That’s just my guess.
VIX high of the day: 24.8. Well damn, it could actually go higher. I wasn’t expecting VIX to jump the way it did today.
Markets sold off so quickly today. I wouldn’t be surprised if tomorrow is a slow day or even a little rally off today’s quick selloff.
But there is still a ton of risk in this market right now. China retaliated against US tariffs by halting the purchase of US agriculture. Xi isn’t very happy right now.
I don’t know what is going to happen next to be honest. I took $4.6K in profits today, mainly from SPY puts, IWM puts, and VXX calls that I had been building up over the past two months.
I hedge all of my trades because I’m bad at predictions. But my best guess is that tomorrow is a day for the market to catch its breath, but I do expect this selloff to continue through the end of this week.
Also, a VIX explosion tomorrow or Wednesday remains on the table. I’m talking 70% gains or more…
This is subject to trade if US-China negotiations and relationship recover in the coming days.
Stoic Trader 
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