I love to be right as much as the next guy... but sometimes it's no fun.
Since the end of August - weeks now - I've been pounding the volatility drum as October got closer and closer.
That was the topic on the table this week, when I sat in with Suzanne Sena for a Fast Profits video trade.
We focused our discussion on the seasonal volatility that's as closely associated with this time of year as yellow leaves and jack-o'-lanterns. (If you haven't seen this Fast Profits, you can click here to watch it at any time... and e-mail to thank me when your stake doubles.)
Anyway, the CBOE Volatility Index (VIX) was sitting just below 16 while Suzanne was interviewing me. During that chat, I pointed out that a break above 16 would swing the market into selling mode and subsequently shoot the VIX toward readings around 20, where we would likely see a break in the selling.
And that's more or less exactly what we saw as markets try, with mixed results, to pare their losses as I write this.
We're moving into a period where keeping an eye on the rearview mirror will give us vital intel for going forward...
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The VIX is pulling back from its intraday high of 24.52, the highest reading of the "fear index" since April.
Hey - remember April?
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Let's reminisce for a moment because it feels like a lot of people have forgotten about the market's early spring performance...
April was U-G-L-Y. So was March, and of course, February was a mess.
Over that three-month stretch, the S&P 500 dropped about 12% from its January high. As bad as that sounds, in the end, it was only a healthy correction. After all, stocks always take a breather during strong bull markets. And that's exactly what happened in February.
Regarding this latest pullback, the media and everyone else will likely tap tariffs, trade wars, and interest rates as the reasons for this reversal, but I don't care about any of that - not right now.
As long as the pullback remains healthy, I really couldn't care less that we're seeing the market take a breather. But it's important that I stress that I'm not concerned with the "whys" and "hows" right now only because the pullback is healthy.
Here's what I'm looking at.
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Now, critical to all this, whether we go higher from Friday's rally or fall through the floor, is...
For now, we're still looking at a healthy correction, but I'm watching the three aforementioned points very carefully. The second the market tips its hand a little for a rebound, play the short-term rally that develops, riding the wave of buying with short-term bullish positons.
However, more than 60% of the initial rallies following a pullback like this wind up failing. Those are called "dead cat bounces." If that looks likely, be ready to pounce on the market with some hedged positions to take quick bearish profits.
Bottom line: Get good and hedged, with a mix of calls to leverage a move higher and puts to capitalize on a move lower. Stay nimble, and be ready to "cut bait" the instant the near-term trend is confirmed.
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About the Author
Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.