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'Rev Shark': Don't Let Low Volatility Turn You Into a Fortune Teller
Originally published June 27 at 7:32 a.m. EST
"Markets love volatility."
--Christine Lagarde, Managing Director of the International Monetary Fund
At the time of publication, Rev Shark had no positions in the stocks mentioned.
A lack of market volatility can make traders do dumb things. The inclination of aggressive market players is to constantly look for action, and action is a function of volatility. When there isn't much movement, the easy thing to do is to start predicting it. Everyone knows that market conditions are constantly changing, so why not start looking for the next big shift in the market to occur? Making predictions is the easy thing to do.
The problem is timing. There is no way for us to know when this period of low volatility will come to an end. Even if we forego trying to predict market direction, there still is no way to predict when there will be increased market movement.
In the past couple of years, we have set records for streaks of suppressed activity. Following the Brexit rally in June 2016, the market had a very long period of low volatility from mid-July through October 2016. Anticipation of the Presidential election finally caused volatility to pick up, but it lasted months longer than nearly anyone predicted.
I'm not going to go into great detail as to what is causing this, but it is pretty obvious that it's a combination of computerized trading, ETFs and ultra-short-term strategies that are buy every dip and sell every rally. The computers are focused on extracting millions of pennies on a daily basis and that suppresses the movement.
There is no question that this sort of action is frustrating for human traders that are looking for opportunities. There is hardly any movement, and setups do not produce results.
The inclination of many humans is to start making predictions. They roll out long lists of all the fundamental and technical issues and predict that a big move is coming. How can anyone resist such logic?
We all know a big move will eventually occur. Low volatility always eventually leads to higher volatility, but the trillion-dollar question is when? What will be the triggering event? Do we position now and then wait patiently for the event to occur?
That is the dilemma of this market. Do we allow low volatility to make us impatient? Should we make predictions because we have nothing better to do?
Action for the sake of action is seldom a good thing in the stock market. We may not like it, but the best course of action is to cultivate further patience and simply wait for volatility to pick up. We will know it when it happens, and it will be a great relief because we can do more.
In the meanwhile, we must embrace the fact that the market is going through a period of low volatility and isn't offering us much opportunity. Embracing the reality is better than trying to create opportunity when little exists.
There is a little bounce in oil and some headline news, but it is looking like another very flat open.
'Rev Shark': Looking for Names to Slowly Accumulate in This Inconsistent Action
Originally published June 29 at 10:47 a.m. EST
Consistency of market action makes the job of trading much easier. That is why traders are constantly looking for patterns that repeat. For example, they have done quite well exploiting the consistent dip-buying action. However, the lack of consistent price action over the last few days is presenting some major challenges for market players.
At the time of publication, Rev Shark was long HIIQ, TTD and NTNX, although positions may change at any time.
We had a technical breakdown on Tuesday, an energetic recovery on Wednesday and now things are breaking down again. The Nasdaq 100 ETF (QQQ) - Get Invesco QQQ Trust Report is close to giving back all of yesterday's gains as the FAANG and momentum names are being hit. Banks are helping to hold up the S&P 500 while small-caps are showing relative strength. Breadth was stellar yesterday, at nearly 3 to 1 positive, but today its running 2,600-3,700 negative.
The lack of consistency is the hallmark of computerized trading. The machines are jerking the market around because that is how they gain an advantage over slower-moving humans. The best way to deal with it is to change your time frame and not allow the 'noise' to affect you. When the moves are sizable that is hard to do. You have to think in terms of moving incrementally and, in many cases, you need longer time frames and looser stops.
Yesterday was difficult if you held index shorts, but it you viewed the machine action as noise rather than technically meaningful it made it easier to hold. If we take out yesterday's lows today that is going to cause some emotion to build and will be a setup for another sizable move.
I may add to index shorts if the selling pressure persists, but I'm waiting for now. My main task right now is to identify potential candidates to slowly accumulate in this inconsistent action. Names like Health Innovation (HIIQ) - Get Health Insurance Innovations, Inc. Class A Report , The Trade Desk (TTD) - Get Trade Desk, Inc. Class A Report and Nutanex (NTNX) - Get Nutanix, Inc. Class A Report are appealing, but I'm moving very slowly when it comes to additional buys.