After some pretty significant broad market moves in both directions in recent weeks, it's starting to feel like market participants are a bit tired. And can we blame them?
While volatility is often beneficial to active traders who have a good game plan to pounce at opportunities that are presented in such environments, eventually, we get tired. It's exhausting.
Knowing this, we can take advantage of this potential situation by crafting trades that take advantage of the likely decrease of options premiums that often takes place when traders are tired and stocks and indexes start trading in smaller ranges.
So let's use the Utilities sector to express a bet on compressing ranges...
With stocks experiencing week-to-week swings at a nearly unprecedented level, zooming out and keeping a bigger picture in mind is an essential. The Value Line Geometric Index’s affinity for round numbers makes this an easier exercise.
Why It Matters: The Value Line Geometric Index (a broad proxy for the median US stock) is in the middle of the range between 500 and 600 that has been intact since Memorial Day. Prior to that it spent 15 months moving from 600 to 700 and then back to 600. Looking back over the past 15 years, round numbers have acted as magnets for this index. If this tendency holds, a break above the August peak could clear the way for a test of its high near 700. Conversely, breaking below the September low could lead to a test of 400, a level seen during the COVID sell-off & recovery. Which way it breaks remains to be seen - but the lines have been drawn.
Don’t take your eyes off the US dollar and interest rates!
I know it’s been a long year, but we’re finally witnessing early signs of potential trend reversals. The breakdown in the dollar last week confirmed the mounting evidence suggesting the USD has reached its peak.
Now, will interest rates follow?
Check out the dual pane chart of the US dollar index $DXY and the 30-year yield $TYX:
They look almost identical. The recent breakdown in the dollar marks the lone flaw between the two, raising the question…
Will the strong relationship between rates and the dollar hold?
I won’t pretend to know where rates are headed. But if the dollar and rates remain on similar paths, my money is on declining yields at the longer end of the curve.
A falling 30-year yield also makes sense based on a...