Economic data came out on Tuesday and once again, the economy seems to be too strong and showing no signs of weakness. The issue is that demand is still too high and that won’t help inflation, which means a more aggressive Fed is coming, as promised.
I want to review some positive news about last Friday. Despite a 1000-point drop in the DJIA, the volume on the S&P 500 ETF, SPY, was still pretty low.
Look at the past during some of the other major drops in price and you’ll see volume increases into the drop. This last drop that started in mid-August never had that momentum in volume. Even on the day of the big drop (downward pointing arrow), the volume was still pretty low compared to the average volume over the last 4 months.
Now to the bad news. The volatility index, the VIX, is still pretty low. We’d normally see the VIX around 30 or higher when we see a market low or even a major trend reversal. The VIX spiked up to 85 as the market was making its covid low. My concern is that the market dropped 3% in a day and the VIX went from 24 to 26?! Volatility stayed flat in the days since. Where’s the fear?
We know that the professional traders are coming back next week after the break and some of the algos may be on hold until people get back, but another point of concern is the number of indices that have broken under their 50-day simple moving average. This is a key indicator for many algos, pension plans, and retail traders.
We could see a couple of days below and just as easily see the markets pop up next week. Using moving averages as support and resistance isn’t an exact science, but this is certainly an indication of caution.
So what do you do? What options do you have?
What happens if we see another drop that we saw from May to June? What can you do to protect yourself if the market drops another 10% from current levels?
I’m not a registered financial advisor, so the following is for education only,
Option #1: Cash is a position. You can peel away some of your capital and have your account be 50-80% in cash for the next 6 to 12 months.
Option #2: Reduce position sizing for new trades, keep your long-term assets, and maybe add a hedged position until we’re in the clear, whether it be 6-12 months from now or 1-2 years from now. Adjust your typical position size based on the volatility of the market.
Option #3: Use tactics that are able to straddle the market and be able to play both sides as the market gyrates over time. Non-directional trades, like an Iron Condor, can help you benefit from spikes in the market direction and then ultimately return back to its average.
Most of you are familiar with the services of Traders Reserve so you already know that I’m a fan of option #3. Our services have the potential to return profits to your pockets each week. Our goal is to get consistent profits, no matter what the market does.
It doesn’t matter what the markets are going to do or what the history books say about September, using the tactics that you’ve learned from Traders Reserve can help you play both sides of the market. Adapt your tactics and strategy to the market you are in now.
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