The sell-off is not completed

Investors must now price in additional tariffs on China, and further conflict going forward with regards to China.

We won’t have a trade deal anytime soon. It’ll take a while for the repricing of assets to trickle through the market, just like it did back in May.

As I mentioned earlier, I expect IWM to pullback 5-7% since it broke the $153.50 support level earlier 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.

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.

However, a quick resolution on China trade would negate this scenario.

Reviewing the Past Week Predictions

On July 31, after market close, I predicted:

VIX will peak around 23-25.

SPY pulls back to $292 by the end of this week.

IWM pulls back to $151.

My VIX prediction was way off, with VIX finishing at 17.6 today.

My SPY and IWM predictions were pretty damn good though. SPY finished at $292.97 and IWM at $152.48.

More predictions will come…

FOMC Meetings and Market Behavior

Last December I learned a valuable lesson: be cautious around Fed meetings.

I remember seeing the market sell off. VIX jumped through the roof.

To me it was obvious that the Fed was going to hike rates. They said they would hike rates, markets were sold off, but not so oversold where the Fed was concerned about backing off the rate hike plan.

Then the market sold off. I thought it was crazy. I thought people had already priced in these Fed expectations. I was wrong.

When a similar situation took place in March, I realized that Fed days bring volatility. Why? Investors are obsessed with interest rates and Fed policies. The world’s central banks, led by the Fed, have babied along this 10 year bull market all along the way.

Zero-interest rate policies, quantitative easing, and easy monetary policies have all propped up this market in an effort to combat deflation.

Investors need the Fed to keep the market afloat. The game has changed, and this is what investors rely on.

Fed meetings solidify estimates that markets have priced in, or they rock the boat even more when estimates were not priced in. Then investors move on to speculation about the next Fed meeting. And thus the cycle continues.

Nailed it. Again.

This morning I wrote:

SPY is up 0.33% this morning, as of 9:54 am.

IWM is also up 0.50% this morning.

VIX is down 6.64% following its pop yesterday.

I don’t expect this to last. I believe this is a short squeeze that will reverse by 11-12 am today. At that point, the sell off will continue.

Consultation of the charts shows:

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The selloff on SPY and IWM took place around 1:30 pm today, when Trump announced more tariffs on Chinese goods.

Damn I’m good. Or maybe I’m just lucky. But I was expecting a volatility event for a couple of weeks now, and it finally came.

Trump’s Control over the Market

Donald Trump knows what he’s doing when he threatens to slap additional tariffs on China, starting September 1st.

trump

The past two time the VIX began to uptrend, Trump announced additional tariffs on Chinese goods.

tariffs

Coincidence? I don’t think so. Trump knows the market has a good chance of selling off. He knows the market is at highs. He uses this as leverage to justify tariffs.

What do you think?

Markets haven’t been normal since 2007

The markets have been manipulated since the 2007 financial crisis.

Zero-interest rate policies, quantitative easing, taper tantrums.

Investors don’t know how to function without the Federal Reserve playing games with interest rate yields. Investors think the Fed will always be there to save the day. But they won’t be.

It’s not up to the Fed to save the market every time. But when the Fed does step in and influence the market, investors to expect that intervention every time.

Free markets haven’t been been free. We’ve lived through a decade of manipulated markets. At some point in time, the bill will come due.

Stock Market – August 1, 2018

SPY is up 0.33% this morning, as of 9:54 am.

IWM is also up 0.50% this morning.

VIX is down 6.64% following its pop yesterday.

I don’t expect this to last. I believe this is a short squeeze that will reverse by 11-12 am today.  At that point, the sell off will continue.

What do you think?

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