There is something about the 11th day of the month that has produced a near constant trend in price action in Stocks through the year - Can you spot it? The 11ths are marked with a vertical line.
I tried to title this post 'The Glorious 12th', the expression used to mark the opening of grouse season, but I couldn't really justify it as it's the 11th OR 12th when prices are beaten into the air with a flurry of feathers. Even back in January when the world was falling apart (apparently) the markets tried to rally on that day. Will today be any different?
This is where I run in to difficulty in substantiating things because, like any other human, I look for patterns that support the mental constructs I use to make decisions in life. We like to know that the rules work as that removes risk and none of us like risk. My problem is that I am turning bearish. I don’t want to be long of risk into June, though that has been my natural position all year.
Earlier in the week I pointed to the Chinese People's Daily article as a crack in the Chinese economic San Andreas fault, together with the normal catalogue of concerns. But two days later we have more bad news to add and can point to Brother Bear visiting Disney as a catalyst to last night’s sell off. We can also add price to my worries, as the zoom higher in equities over the past couple of days was pretty vapid other than put/call ratios into expiries and a few other technical issues. As also mentioned in that last post, the 2080 area in SPX is important and could mark a perfect point to form the right shoulder of a head and shoulders pattern. the price action of the last 12 hours fits that perfectly (go back to the top chart and look at the horizontal lines) and though no confirmation until 2034 breaks, more folks will be trading it as a possibility.
If I want to back-fit my 11th of the month theory, I may even try to say that it is a trend change day, or a rebalancing day of long term positions in order to lever the theory into my desire to sell. The rebalancing theory fits with option put/call imbalances and also with positioning data that, until recently, has shown a market net short of equities against benchmark. But this month the portfolios and bear/bull indicators feel much more neutral (see BAML research).
As for the trend change day I will introduce another indicator. One that I am always ridiculed for following, but as have done so for the past 18 years I will proudly present it again. The Bradley Siderograph, which is showing the magical 11th of May as a market turn date. I feel too embarrassed to say it's based on planetary alignment, but it is.
I feel that the next two days are crunch time for trend. With VIX so low I am buying straddles, not just buying the VIX, as that falls as prices rise. I’d rather pay theta to receive delta. Which makes me think about all those people now trading VIX thinking they are trading volatility. In one sense they are, but they are not trading realised volatility they are trading implied probability so there is a huge skew of lost returns due to having neutral delta throughout and trading implied vs implied rather than implied vs actual (We can’t call it historic vol as it is the 'now’ component of underlying price you are measured against, and if you don’t believe that try buying historic vol and see if it moves!).
If I were to add a bit of reverse VIX input into my normal option structure I may be helped along the way by the market positioning in VIX. It would appear the market is very short of Vol (which always causes fun when the unwind comes). Wondering why folk are actuvely short vol makes me wonder if the chasing performance on the upside, by underwieght funds, has involved desperate beta subsitution through vol selling.
Just a final thought on the subject of risk, I have been thinking about attitudes to risk and what drives us as individuals and a society to reduce risks or take them. This led me to wonder if there is a Brexit in/out bias along the lines of market risk buyers and market risk sellers, with risk sellers preferring IN and risk preferrers wanting OUT. Intuitively that makes sense. But if it were true and we then drilled down and asked the market risk sellers why they were selling risk and they cited Europe, well then there is the twist. But, it's all surmise and wondering and only raised as it's the sort of thing my mind wanders off to think about in the great behavioural universe