Markets are in total disarray. I traded through the Crash of '87, and through the Financial Crisis of 2008, and this is worse. On Wednesday night, March 11th, I was asked "Do you think we're going to crash?" My reply was, "I think we already have."
This article was originally published in The Option Strategist Newsletter Volume 16, No. 5 on March 9, 2007.
One of the things that one hears from “old-timers” when the market declines sharply as it has recently, is that money managers are so young they’ve never seen something like this before. Personally, I don’t buy that. You can’t tell me that the hedge funds and large institutional money managers don’t have someone in a supervisory or risk control role that isn’t at least old enough to have seen the 2000-2002 bear market, the October 1997 and October 1998 mini-bear markets, and probably even the Crash of ‘87. At the very least, they saw the correction in May-June, 2006. I think what prompts “old-timers” to say such things is that each time the market peaks before one of these sharp corrections, it seems that these big money managers are buying with total abandon – as if they don’t remember the lessons of the past. And that may be true. Perhaps these money managers were operating during past corrections, but they think this time “it will be different.”
Stocks had been declining somewhat since mid-August 1987. The week of October 12-16, 1987, saw an “up” day on Tuesday, October 13th, but then three successive down days, through the rest of the week. Friday, October 16th, 1987, was an expiration day (back then, the 3rd Friday was the only monthly expiration for listed options). The Dow closed down 110 that day – the worst decline, in points, in its history.
The markets are moving so quickly right now that it's difficult to assess some of the technical indicators. This is the first time since the 2008 financial crisis that volatility-based hedges are keeping traders afloat.
After two monster rally days this week (Monday and Wednesday), $SPX has resumed its decline with a vengeance. The lows of last Friday, February 28th, at 2885 still represent support although in a market moving this fast, is there really any "support?"
A week ago, $SPX was still pushing higher. Then, in the blink of an eye, $SPX gapped sharply downward on Monday morning -- leaving a huge gap on the chart that likely isn't going to be filled anytime soon.
Nearly every indicator we have is in oversold territory, and there will be buy signals in the relatively near futures, but there are none at this time. Support levels don't mean much right now, so it's fruitless to try to identify them.
This article was originally published in The Option Strategist Newsletter Volume 18, No. 4&5 on March 5, 2009.
We have been using the hedged strategy between volatility and the broad market for over a year now, and the results have been good. But there’s more to this strategy than meets the eye. So, perhaps it isn’t useful only when $VIX futures are sporting a big premium or discount. It might make sense in a broader array of situations.