Going From Extreme Greed To Extreme Fear

March 15, 2023

We’re back to where the market violently changes with each passing day. This is the type of daily swings we saw at the peak of the bear market in 2022 and it’s enough that we may finally see a period of capitulation where investors throw in the towel and give up. That’s usually around the time of a bottom in the bear market.

Don’t get me wrong – the horizon is an absolute mess. I’m not saying this is the end of the bear market, but I am saying that market bottoms come after periods of negativity crashing down on the market, the fear gauge goes off the chart and volatility spikes. We know it will get better and the clouds will start to dissipate eventually. Sadly, we’ve seen this all before, but it never feels good at the time.

This chart says it all. One month ago the gauge was at 71 out of 100 – we were in greed mode. Now we’re sitting as low as 19 (we came up a little since I first looked and then took the screenshot).

One month is all it took to go from one market extreme to another. Even one week ago we were at a more neutral 43 reading.

The 10-2 spread is inverted and hitting some of the lowest levels in decades, but is coming off its bottom. As many of you know, an inverted yield curve is typically a precursor to a recession that can come six months or more later down the road. What’s interesting about this chart is that we’ve been inverted for months. It hasn’t been since the 2000 dot-com bubble that we’ve had an inverted yield curve for this long.

The S&P 500 (ETF: SPY) is holding 3800 for now.  

If we zoom in a little closer, we can see the same chart, but look at the far right.  Despite the big moves, we had three days in a row where we closed higher than the open.  

In the final part of the trading day yesterday, the market did rally off the lows and closed near the high for the day. That was in part due to the Swiss central bank saying it is ready to provide support to Credit Suisse. Switzerland’s central bank said Wednesday it was ready to provide financial support to Credit Suisse after shares in the country’s second-biggest lender crashed as much as 30%.

The Fed is up next and they are stuck between a rock and an impossible place. We’ll get more into that as we get closer to next week’s Fed meeting.

I hesitate to issue a trade because everything changes so quickly. I could suggest a bearish trade and by the time this gets to your inbox we could be seeing a +500 day, but here it goes. It’s a bearish trade idea.

Kimberly-Clark Corporation (KMB) has been in a solid downtrend since the beginning of the new year and has sold off after every strong up-day. Will the trend continue? Yesterday the stock rose 1.75% so is it time for KMB to break down lower once again?

The current price is $125.82. Normally, I don’t like going out long distances in time when selling call spreads, but the liquidity isn’t there in the weekly options, so I’m looking at the 21-APR options.

Sell to open KMB 21-APR 130 call
Buy to open KMB 21-APR 135 call
Price: 1.15 – 1.27 in credit

When volatility is this high – it’s ok to skip trades or reduce your trading size.

This too shall pass.

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Jeff Wood

Editor, Filthy Rich Dirt Poor
Coach, Options Testing Lab

Any trade or trade idea discussed is for educational purposes only.  They will not be tracked as an official trade recommendation. 

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