Yo Pit Crazies,
As a conditional trader I believe in cause and effect.
If A goes here, B goes there.
If the S&P 500 stalls, implied volatility should soon follow. If it doesn’t, something is up.
Creating trades to respond to that action is what we do on The Trading Desk.
A big question we deal with is: What is the appropriate trade for the Volatility Zone we are trading?
Answers, in the form of trade ideas, come about daily.
Right now, 10-day realized vol is 10% in SPX, the lowest in a year. VIX is still 19%, so that is a hefty premium. I think it has something to do with the Upside Down.
The Fed minutes reflected worry about a recession brought on by the banking crisis. The whole point of raising rates was to slow down demand and in the process hurt the value of bonds held by banks and investors. Now J-Pow and co. are concerned about that?
Ultimately, the issue was solved once again with QE as banks were offered the chance to turn in bonds at face value. Banks leapt at that deal … and pushed the reckoning farther out – again.
Vol Man noticed two 1% ranges waiting for the Fed to say its thing and after the central bank spoke. We closed on the lows with VIX down .01.
SPY Two-Day Chart with One-Minuted Candles
What does this mean for today and going forward?
Click here to find out.
QE Still Rules the Day, But Impacts Are Diminishing
Quite simply stocks don’t sell off when the Fed keeps coming to the rescue.
All week, Fed talking heads said the economy is strong, but they were worried about a recession behind closed doors.
That leads me to the conclusion that they will continue to raise rates slowly now and see what happens.
The inflation numbers were a little lower, but still high. Anyone buying food or gas knows this.
So the QE will continue while we raise rates – we’re living in the Upside Down!
The Upside Down is a place where we’re trying things we know don’t work.
This is what created the Financial Crisis of 2008.
Elsewhere, current fiscal policy is at odds with what the Fed is trying to do. The list goes on.
If the Fed keeps QE going while raising rates, we are in a weird situation in which the market does not clear. Some assets like stocks or the Invesco QQQ Trust (Ticker: QQQ) stay artificially high since Fed activity is promoting that trade. That is until the market decides those assets are too high.
The small sell-off we had yesterday probably goes away today and VIX recedes back to 18. Then we meander higher SPX.
Until there is some real policy change, we are stuck in the Upside Down.
I think iron condors on SPX/SPY will work well here. That is something to discuss in OP Mentoring this morning.
To Your Trading Success,
AG