FREAKY TALES
With the recent price action, it has become clear that the market is doing its best to force participants into the belief that a demon child is forming in the womb of the financial system. Moves like we experienced on Friday are meant to create a fearful environment that causes participants to either get more liquid, hedge or get short the market. There remains an excess of optimism that is inhibiting the market from moving over the substantial, historical resistance that is directly ahead of it. What Friday did was create a sense of fear in as efficient a form as possible. That efficiency came from the fact that the markets were essentially unchanged for the week. However, the levels of fear increased and the levels of optimism have decreased substantially.
I am nowhere near prepared to relieve myself of the substantial burden of having a majority of the portfolio in cash. Nor am I prepared to break away from the comfortable state of being market neutral via the portfolio hedge in TZA. What I am prepared to do is acknowledge that the market are in for a period of unpredictable, choppy, doo-doo stained behavior that is going to repel traders, investors and all those in between away from the markets. Tools to avoid volatility, such as cash and hedging exposure, will continue to be the mode du jour.
There is a substantial wildcard, however. The elections. More specifically, the uncertainty that can arise from not having a clear winner. And perhaps even, the surprise that can come from having an unexpected winner. This would increase general volatility. Barring a complete electoral disaster, I don't expect it to sink the market, however. This is a market that seems resolute to chop sideways for the next several weeks.
Here is a technical look at the Nasdaq Composite, uncovering some interesting findings:
click chart to enlarge
NASDAQ COMPOSITE
