Search This Blog

Thursday, April 28, 2011

Market Thought... re-evaluation

I learned a lot trading. The two most important lessons were to 1. manage risk and 2. know when your wrong.

I have developed a pretty good trading methodology, and I do not hesitate to act when 'it' tells me to do something.  My safe guard to this lack of hesitation is that I always re-evaluate a thesis.  When a thesis is intact, I stay firm (most recent example being AAPL or IBM when it was cratering on a down grade).

But when a thesis is in question, I have to swallow my pride and re-adjust. (It doesn't happen much, but I have done it before.)

Up until April 18th, my Market Thought posts have been pretty dead on, and a contributor to this fact has been this chart:

The pattern was basically to short when the Vix, via the SP500 overlay, got too low.  This pattern has existed for a little over three years.  Because of this, I would give it more weight than other indicators, especially to manage risk.

The factors mentioned in the 'swimming in it' post, along with the Fed easing on QE, I thought the chart would still be in play. I later, tried to re-enforce the thesis with the 'cautious' post. But the market action is telling me I am wrong. The top end of the channel range melted through, and now a new support has developed.

This is further emphasized when valuations and individual stocks are taken into account. For instance, IBM is entering a new multiple trading range.  If IBM can enter a new trading dynamic, something I have been endlessly touting, so can the market.

I re-examined the Vix going back to its existence, and realized a statement of mine in the 'cautious' post is incorrect. I stated, "The Vix is a fairly complicated ratio of call/put SP500 options, but a ratio none-the-less. Prior to 2002 the Vix has historically bounced off the current level (around 16 as the low) and low 30s as the high.  Since it is a ratio, the pattern should remain intact, unless there is an external force corrupting the equation. (ie extreme complacency as seen in 2002-2007)"

I am not going to try to pretend to be an expert on the Vix and why it will act a certain way. But I think I understand patterns pretty well.  The entire Vix chart tells me the Vix can go to around 10 as a low end, regardless the reason.

The 'reason' may present itself later on, but I have to adjust to this new potential trading dynamic of a lower Vix.

No comments:

Post a Comment