Yo, Pit Crazies,

 

The concept of a “vol regime” may be foreign to new retail options traders.

 

Back in the day, “seasoned” options pros – and I know a few! – would get together on the floor or a bar and wonder when it was “over.”  As in, when will the current state of volatility end and things go back to calmer, happier times.

 

This is why I developed my conditional trading approach for retail traders. Students can learn it to some degree in all my services and in OP Mentoring and Pro.

 

Our current market is in two volatility states:

 

• The extraordinary expansion of money and fiscal policy during and after COVID
• The big jump in inflation that it caused

 

Consider the 5-year VIX cycle below. Vol Man kindly marked the lower regime and the higher regime with the spike in Covid as the demarcation line. I see two different markets there, on the left and right of the spike.

 

5 year VIX chart with 1 day candles

 

If I was hanging out at Ceres Cafe in Chicago after the trading day and rapping with other traders I would be asking, “When do we get out of this 3 year vol cycle?”

 

Here is the answer …

 

We Need a Period of Sustained Lower Realized Volatility

What that means is stocks have to move less on a close-to-close basis.

 

I have been through several bull markets and the end phase of a bull market on higher volatility is not pretty.

 

Note 2000 and 2021, as both those years produced crazy returns on higher volatility only to lose 30% or more the following year. The problem in 2022 is that the Fed had kept rates so low for so long to enable US government fiscal profligacy that stocks and bonds got crushed in the same year.

 

Now here is the good and bad part: it happened.

 

Bond prices plunged, stocks plunged and folks lost money.

 

The Fed did the right thing finally by protecting the dollar, but the US government has not been able to bring down spending. It is like the Fed and Congress are looking at the same sky and disagreeing on the color. Note what Macron is doing in France to raise the retirement age by two years. Fiscal realities need to hit soon.

 

Since most of these issues were 99% government created, they can be undone to bring market volatility lower and for the long Covid that the volatility market has experienced to subside.  

 

The issue yesterday was Janet Yellen and bank deposits comments. As of now, more banks have not reported problems. So it could really be just a few who had issues and some of the risk measures taken after 2008 are holding up.

 

At the moment, there is only another 25 basis points to go and the painful and necessary rate hikes will hold for a while. That should keep market volatility lower and stocks a bit higher. Keep an eye on the Invesco QQQ Trust (Ticker: QQQ) as it is looking for lower rates and some AI FOMO. 

 

18 VIX is still the floor and likely to stay until no one cares what the Fed does anymore.  In the short term, I think we see an 18 VIX in the next two weeks if no other banks fall apart.

 

To Your Trading Success,

 

AG