It's hard to know exactly where to start after such a wild week, but I have a hunch that you're as keen to answer one question as I am…
Will whiplash trading conditions continue?
That depends on two very specific things.
First, the computers that are causing this mess have to calm down.
Studies vary but computerized trading accounts for 70% to 80% or more of total trading volume in today's markets. Once they decide to buy or sell, humans are along for the ride.
The situation is very much like Newton's Cradle – a device created to demonstrate the conservation of momentum and energy using a series of stationary spheres. When the ball smacks one side, the energy transfers to the other and there's an opposite reaction.
Only in this case, imagine buying on the left and selling on the right. As one computer lets go, every other computer adjusts and so on… until the amount of "energy" they create is absorbed.
That's why you've got such huge up and down moves lately.
Most investors, of course, are totally ill-equipped to handle what's happening because (a) they let their emotions interfere with otherwise rational decisions and (b) they don't have the proven discipline and tactics we do here and at Total Wealth.
From lining up with Unstoppable Trends to prioritizing "must-have" investments to trailing stops and lowball orders… everything we discuss is specifically designed to take away Wall Street's advantage and put the odds in your favor.
Editor's Note: You can learn more about these tactics, plus get access to all of Keith's strategies and recommendations, by signing up for his twice-weekly Total Wealth newsletter. Just click here – it's completely free!
That way you can invest confidently no matter what the markets throw at you and, most importantly, laugh in the face of rocky trading activity that has most investors crying into their beer.
Second, huge bets against volatility have to unwind.
Many investors think that volatility is causing rocky conditions but, in reality, it was the extended period of no volatility that did.
That's because money managers running hundreds of billions of dollars got greedy and placed huge (very naïve) bets that market conditions would remain the same using highly leveraged instruments like the ProShares Ultra VIX Short-Term Futures ETF (NYSE Arca: UVXY) and the iPath S&P 500 VIX Short-Term Futures ETN (NYSE Arca: VXX).
To give you an idea, the iPath opened at $45 last Thursday but hit $55 – making anyone who owned it $10 a share. However, those who had bet against it lost the same $10. Many probably lost a whole lot more, though, as the leverage went against 'em because they borrowed to take on the position. That doesn't sound like a big deal until you realize that 85 million shares changed hands – or $4.6 billion on just this one instrument… and there are dozens of similar inverse leverage funds out there.
Must See: This Great Depression-Era "Secret" Helped Transform Two Teachers into Millionaires. Read More…
Where this really gets painful for Wall Street is the big funds and institutional players who thought they were so smart by placing these bets don't usually have the cash to back 'em up. They're leveraged up to their proverbial eyeballs to maximize returns. So, they have to sell other positions to raise cash or risk a "margin call" that could destroy their funds and their firms alike.
Very quickly FOMO – fear of missing out – turns into "oh no" and vice versa as prices bounce in both directions.
Now, we saw huge amounts of money on the move last week, so the situation is a lot better coming into this week, but Monday's trading action combined with what I saw Tuesday tells me this isn't over.
Market data reinforces this.
In fact, there are huge parallels between current conditions and those from March 1996 to March 1997, when the markets underwent a massive correction before shooting another 86.03% higher to peak in March 2000.
Interestingly, Jeff deGraaf, chairman of Renaissance Macro Research, also picked up on this. He noted to CNBC Monday that the picture associated with the top 25 correlations to current trading action suggests "a pause of a few weeks and resumption of trend."
The speed with which we saw the correction materialize is critical. The S&P 500, for example, dropped 3.75% in a single day on Monday, Feb. 5, and 5%-plus in six trading days after reaching its all-time high on Jan. 26. According to Sam Stovall, chief investment strategist of CFRA, that means a correction bottom could happen a full 10 days earlier than normal.
My research agrees – most corrections end within 90 days, albeit after some very bumpy trading.
So now what?
About the Author
Keith Fitz-Gerald has been the Chief Investment Strategist for the Money Morning team since 2007. He's a seasoned market analyst with decades of experience, and a highly accurate track record. Keith regularly travels the world in search of investment opportunities others don't yet see or understand. In addition to heading The Money Map Report, Keith runs High Velocity Profits, which aims to get in, target gains, and get out clean, and he's also the founding editor of Straight Line Profits, a service devoted to revealing the "dark side" of Wall Street... In his weekly Total Wealth, Keith has broken down his 30-plus years of success into three parts: Trends, Risk Assessment, and Tactics – meaning the exact techniques for making money. Sign up is free at totalwealthresearch.com.