Likely outcome to 3 std dev + bull volatile

bull markets market regime strategy Feb 15, 2021

As I've been saying, the group of knowledge and skill we have put together in the Trading Lab is amazing! A number our members have already partnered up and collaborated on building their own trading strategies for their own unique needs. Not to mention our live portfolio us up over 40%, and that includes the hedges we put on earlier this month in $QQQ and $GLD to protect our downside. 

Today is the last day that you'll be able to join the Trading Lab at these prices, we will be doubling them tomorrow. You can lock in your price forever if you sign up today.

On to the markets...

You'll notice that I've been a lot more prolific with my emails this past week. That's because things are getting very interesting. 

For the past 5 or so months I have been the most bullish guy on Wall Street. Buying dip after dip, buying rip after rip. I was telling everyone I know to buy for any reason that they could think of, buy because the market dropped, buy because it rallied, buy because the day of the week ended in Y. 

That's because we were in a Bull Quiet market regime, and that's exactly how you trade it. Prices will resolve higher, so just be long and be as long as you can be. You could make a career out of finding only Bull Quiet markets and piling in, then spending the rest of the time not doing anything...and you'd still run circles around most people. 

But there are some storm clouds ahead.

First, we find ourselves smack dab in the middle of a Bull Volatile market regime. Unlike Bull Quiet, the Volatile version is quite violent. The most notable feature of a Bull Volatile regime is that it is a requirement to a major market top, but doesn't signal a major market top.

If you are in a Bull Quiet regime and you get a big selloff, it will be bought back up and will be short lived. If you are in a Bull Volatile regime and you get a big selloff, expect it to go even further and be much worse. 

Bull Volatile regimes generally mark a cooling off period in markets that get a bit too hot, so while you may not get a major market top, you can spend some time holding a price level to to realign everything. 

Next September is historically (tested back to 1929), the weakest month of the year. Again, this isn't a complete certainty that September will be weak, but 90 years of data says that it often times is. 

None of those are quite that definitive to confirm weakness ahead. 

More definitive is a market closing its month above 3 std deviations. >3 standard deviations most often precedes a decent selloff. But when you stack the Bull Volatile market regime along with >3 std deviation monthly close, you get a lot more reliability. 

Going back to the year 2000, this is the outcomes each time $NQ was in a Bull Volatile and closed the month >3 std deviations:

  • 7/07 -10%
  • 9/09 -5%
  • 4/12 -12%
  • 12/13 -1%
  • 8/14 -10%
  • 4/17 +1%
  • 5/17 -7%
  • 1/18 -13%
  • 12/19 +5%
  • 2/20 -30%

There were 10 instances, 2 were positive, and 8 were negative, 4 of which were -10% or worse (ahem CoVid19).

All of this points to the POTENTIAL for weakness ahead, but doesn't confirm it, so don't go buy a mountain of puts on $AAPL because Chris has put together this bear case. 

My plan remains to maintain my long positions, possibly lighten up a little big and to hedge with options.

There is still a mountain of capital that has not yet been deployed. I spoke to a friend who has $2bn under management and he is only about 20% long sitting on 80% cash. This coincides with what Alex Barrow @MacroOps shared today in his weekly "Dirty Dozen" newsletter (which you should subscribe to). 

TLDR; Hedge Funds have missed the rally, and they need to enter this market or get fired by their clients. 

Like Alex, I believe they are simply waiting for an opportunity to deploy capital in big ways. They've spent the last 5 months listening to clients ask them why they aren't investing their money, why clients are paying management fee's to sit in cash. You better believe they have a plan to get long in the, ahem, historically worse performing month of the year as they need to finish Q4 strong so as not to have a pile of redemptions show up January 2021.

You can also look at this as if the market keeps pushing higher from here, they WILL be forced to buy, and you can almost guarantee that they won't be buying a lot of $FAANG stocks.

And don't forget to Join us in the lab prices will double tomorrow

If you like my work, consider forwarding to a friend or colleague as a thanks!

See you in the lab

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