While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to six-month time frame, Mad Day Trader, provided by Jim Parker, will exploit money-making opportunities over a brief ten minute to three day window. It is ideally suited for day traders, but can also be used by long-term investors to improve market timing for entry and exit points.
Global Market Comments
October 9, 2013
Fiat Lux
Featured Trade:
(CUTTING BACK MY RISK),
(SPY), (FXY), (YCS), (DXJ), (AAPL), (NFLX), (HLF), (VIX),
(WHAT?S GOING ON WITH THE VOLATILITY INDEX?),
(VIX), (VXX)
SPDR S&P 500 (SPY)
CurrencyShares Japanese Yen Trust (FXY)
ProShares UltraShort Yen (YCS)
WisdomTree Japan Hedged Equity (DXJ)
Apple Inc. (AAPL)
Netflix, Inc. (NFLX)
Herbalife Ltd. (HLF)
VOLATILITY S&P 500 (^VIX)
iPath S&P 500 VIX ST Futures ETN (VXX)
By now, you have figured out that I executed a major ?derisking? of my model trading portfolio today, cutting my exposure by two thirds. Most of these positions only had a few basis points in maximum profit left, so bailing here was a no brainer, a case of ?Basic Risk Control 101.? Better to laugh about the market in a few days or weeks, than cry. My profits this year are so huge that they are well worth defending.
There is an eerie silence going on in the markets now. All real news has ceased. The government data releases that dictate the short-term direction of prices have come to a complete halt, thanks to the government shutdown. The rest of the news is all political, which is to say that it is useless. When markets are driven by opinions instead of facts and data, you want to run a mile.
I recently spoke to some Tea Party activists, and the extent to which they hate President Obama is frightening. They would happily subject the country to another Great Depression if it meant they could be rid of the community activist from Chicago for good.
The debt ceiling crisis gives them the means to do exactly that. Therefore, I believe that the current impasse in Washington will last longer than the market expects. What the Tea Party doesn?t understand is that once you shatter confidence, it is very hard to get it back.
As a result, my friends in the high frequency trading community tell me that the risk of a flash crash is rising. All you need is for the wrong comment at the wrong technical point in the charts on the wrong day and a deluge of cascading selling could result. That day could be October 17.
This is clearly a minority view, but it is not impossible. Take a look at how the momentum names, like Netflix (NFLX) and Herbalife (HLF) are getting hammered today and you?ll see what I mean. This was further confirmed by the volatility index (VIX) breaking through $20 today, up more than 50% from a month ago.
So I?ll let valor be the better part of judgment here and move from a serious ?RISK ON? trading book, to one that is more clearly market neutral. That demands I cash in my winnings in short positions in the Japanese yen (FXY), and my long in Apple (AAPL).
As for my long in the Japanese stock market (DXJ), I?ll have to settle for a stop out with a moderate loss. It?s not the first time that I have lost money in Japan, nor certainly the last. This was the ?Bridge Too Far? among my trades this year.
I still am sticking with my medium term bull case, which sees us moving to new highs by yearend. But we could see one big final flush before we turnaround. That?s when I want to jump in wit both hands and go fully invested once again. To best profit from such a scenario, you have to go into the next dump with the most cash possible. Today?s action gets us close to that point.
After crawling off the mat at the 12% level, and rising all the way back up to 21%, traders are wondering if the Volatility Index (VIX) is finally coming back to life. Or is this just another dead cat bounce?
It wasn?t supposed to work that way. Falling markets should send investors scrambling to buy downside protection in the form of put options, which would automatically send the (VIX) soaring. Except when they don?t.
I spoke to over a dozen market participants yesterday attempting to root out the cause of this seeming anomaly. All I got was shrugs or idle speculation. A (VXX) at this level, the ETF for the (VIX) assumes that the complacency now endemic in the market will continue for several more months. It is betting that the S&P 500 will continue moving sideways or up with no pullbacks greater that 5%. Oh, really?
It is also discounting a rise in the (SPX) to 1,750, based on a multiple expansion from 16 to 17, while corporate earnings are falling. This will see confirmation when Q3, 2013 earnings start to hit in October. Oh, really, again?
I finally got through to some friends in the Chicago pits who explained what was going on. A sizeable portion of the trading community believes that we will see a rise in volatility someday, but not in the near future. So they have been buying October call options in the (VIX). To pay for these and hedge out their risk, they have been selling short calls in the front months of December and March at much higher implied volatilities.
Since the (VXX) focuses on only the front two months of the options calendar, it has taken an inordinate brunt of the selling. This is why the (VXX) has continued a rapid decent even on days when the (VIX) was stable and the Dow was down. Needless to say, it has been a huge moneymaker for the early participants.
How does this end? At some point we do get a serious sell off in the stock market, and the (VIX) rockets back up to 30%, or higher. That means that anyone who initiates this position now will get slaughtered. But the long-term players will simply write those losses off against the substantial short dated premium they have taken in until then.
As long as this dynamic is in place, there really is no limit to how far the (VXX) can fall. As traders roll from one expiring month to the next, they will continue to hammer volatility.
It amazes me how quickly amnesia sets in,? said Stephen Crawford, former co-president of Morgan Stanley, about the willingness of hedge funds to re-leverage positions in these conditions.
While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to six-month time frame, Mad Day Trader, provided by Jim Parker, will exploit money-making opportunities over a brief ten minute to three day window. It is ideally suited for day traders, but can also be used by long-term investors to improve market timing for entry and exit points.
As a potentially profitable opportunity presents itself, John will send you an alert with specific trade information as to what should be bought, when to buy it, and at what price. Read more
As a potentially profitable opportunity presents itself, John will send you an alert with specific trade information as to what should be bought, when to buy it, and at what price. Read more
As a potentially profitable opportunity presents itself, John will send you an alert with specific trade information as to what should be bought, when to buy it, and at what price. This is your chance to ?look over? John Thomas? shoulder as he gives you unparalleled insight on major world financial trends BEFORE they happen. Read more
As a potentially profitable opportunity presents itself, John will send you an alert with specific trade information as to what should be bought, when to buy it, and at what price. This is your chance to ?look over? John Thomas? shoulder as he gives you unparalleled insight on major world financial trends BEFORE they happen. Read more