It’s the middle of the summer and everything is quiet. Even the slightest bit of volatility brings in the panic. It’s pretty amazing to watch. There are two schools of thought here. First, the historic short positions in S&P500 Volatility Index Futures have their monthly unwind, and stocks get adjusted accordingly. It’s a volatility trade unwinding causing these 1 or 2 day spikes. But then the shorts come back in, make money for a period of time and then get swept out again, like this week. The cycle repeats. Now we move on again and volatility shorts crush it for the rest of the summer. That’s thesis 1.
The other scenario is that there is a lot more squeeze behind this one and stocks can have a much bigger and longer adjustment. Take a look at the C.O.T. Reports. The numbers are outrageous. These Volatility shorts are natural buyers of volatility. It’s scary when you think about it. But regardless, they stay short. It is what it is. Stocks continue to shake them off. But is this time different?
We’re going to try and answer that question by going through 1000 charts of the S&P500. Each of the 500 components of the index on both a weekly and daily timeframe. We are going into this exercise with no bias whatsoever. We cannot care in which direction the market is moving. We just need to take the weight of the evidence as it comes and position ourselves as best we can. This is one of the most valuable tools I have, going through this 1000 chart process. I want to walk through it with you this time just so you can understand where I’m coming from when I come up with my ultimate conclusions, or questions for that matter.
A wise Egyptian man once told me,
If you trade the averages, you get average returns
So we’re going to focus on individual stocks today.