Prepare for a three-day weekend.
But before you turn off your computers…
I need to show you a chart.
Don’t adjust your screen - your computer isn’t broken.
It’s just that this chart you’re going to see is absolutely bonkers.
So, strap in before you unplug…
This Is the Mathematical Twilight Zone
The S&P 500 Volatility Index (VIX) is under 14.
That’s a level we last saw back in early 2020 - pre-COVID…
At the time, lots of fund managers were making gobs of money by selling volatility calls to anyone willing to bet the market would tank.
Now, for a very long time, this strategy has worked out.
But when things go awry… the poorhouse becomes home.
It’s one of the reasons that we’ve called this strategy “picking up pennies in front of a steamroller.”
When it goes south, it goes south fast - so fast your head can explode.
Today… investors are betting big on the markets pushing higher. They’ve staked a lot on volatility remaining lower, bet the farm on the blue skies they imagine floating up ahead.
On Thursday, we saw the largest call buying volume levels ever. As in, the entire history of options-trading.
See the chart to the left.
The combination of ODTE (zero-date/expiring within 24 hours) options with retail optimism offers this market stronger legs.
But I never saw a parade of fools I didn’t want to rain on, so today, I turn my attention to the potential downside.
Today is a Quad Witching day – four different kinds of derivatives will expire simultaneously. Volume is likely to skyrocket as players tweak their portfolios and contracts roll over.
What’s more, there are expectations of another rate hike in July, with a higher-than-expected terminal rate forecast, to boot.
That means we must get out in front of this market.
My general philosophy with the markets is to never be the chump stuck without a chair when the music stops.
Even though momentum remains strong, today - the day of Quad Witching and record-breaking options buying - is the day to start playing defense.
Set stops on your positions. Yes, let your winners (i.e., things you’ve owned for more than a year) ride, and let long-term options gains keep running. But set stops today… and a less stressful weekend is virtually guaranteed.
This is a good time for me to re-state the importance of following my momentum signal. As we get to know each other more, you’ll learn that I’m a very defensive investor and speculator.
The music is still playing, so keep dancing.
But keep an eye on those chairs, and don’t be afraid to edge closer to them as you go waltzing along…
If you need another metaphor, look for your closest fire exit. You’ll want to have your hand on the door handle when the casino burns down.
I’ll be back this weekend with a full preview of the week ahead and every move you should make to get your wealth through it.
And then, on Tuesday, I’ll share with you the single most valuable lesson I ever learned about the financial markets.
Hint: It involves Goldman Sachs.
Enjoy your weekend,
Garrett Baldwin
Florida Republic Capital (Available on Substack)
About the Author
Garrett Baldwin is a globally recognized research economist, financial writer, consultant, and political risk analyst with decades of trading experience and degrees in economics, cybersecurity, and business from Johns Hopkins, Purdue, Indiana University, and Northwestern.