VIX and More: Some Thoughts on the Seis de Mayo Mini-Crash

Thursday, May 6, 2010

Some Thoughts on the Seis de Mayo Mini-Crash

There are a lot of excellent charts and commentary out there, but before I called it a night, I thought I would share a couple of thoughts about today’s action and the market’s prospects for tomorrow and beyond.
So…in no particular order:

The possibility of a fat finger order entry error cannot be dismissed, but even if there were one or more unintentional large trades, this does not nullify the concerns about sovereign debt contagion, breaking of technical support, recent excessive bullish sentiment, etc.
The bottom line is that stocks still have serious problems of a fundamental and technical nature.
Today’s correction would not have been so steep if stocks had not rallied so sharply, with only brief interruptions, for the past 14 months.
The VIX spiked over 40 today. While there is no magic number that signals a VIX top, the volatility index is up more than 110% in the last 18 trading days. Apart from September-October 2008, this has never happened in the 17 years since the VIX was launched.
Whether tomorrow morning opens up or down, I would not give much credence to any big moves at the open tomorrow. If I trade at all in the first half hour, I expect I will be fading any big moves.
Looking next week and beyond, I would not be surprised to see stocks enter into a trading range, with the late April highs as a top and today’s lows as a bottom.
Traders should keep in mind that watching and waiting for more market clarity is an appropriate strategy at times. Patience and discipline almost always trump trying to make something happen.
In times of increased uncertainty, I try to focus on preserving capital, evaluating the fundamental causes and likely duration of high uncertainty, targeting only high reward-risk opportunities, scaling in to new positions, and adhering to stringent stop loss and position management guidelines.
Finally, a personal motto is, “In volatility, there is opportunity!”

For more on related subjects, readers are encouraged to check out:

Disclosure(s): short VIX at time of writing

The possibility of a fat finger order entry error cannot be dismissed, but even if there were one or more unintentional large trades, this does not nullify the concerns about sovereign debt contagion, breaking of technical support, recent excessive bullish sentiment, etc.
The bottom line is that stocks still have serious problems of a fundamental and technical nature.
Today’s correction would not have been so steep if stocks had not rallied so sharply, with only brief interruptions, for the past 14 months.
The VIX spiked over 40 today. While there is no magic number that signals a VIX top, the volatility index is up more than 110% in the last 18 trading days. Apart from September-October 2008, this has never happened in the 17 years since the VIX was launched.
Whether tomorrow morning opens up or down, I would not give much credence to any big moves at the open tomorrow. If I trade at all in the first half hour, I expect I will be fading any big moves.
Looking next week and beyond, I would not be surprised to see stocks enter into a trading range, with the late April highs as a top and today’s lows as a bottom.
Traders should keep in mind that watching and waiting for more market clarity is an appropriate strategy at times. Patience and discipline almost always trump trying to make something happen.
In times of increased uncertainty, I try to focus on preserving capital, evaluating the fundamental causes and likely duration of high uncertainty, targeting only high reward-risk opportunities, scaling in to new positions, and adhering to stringent stop loss and position management guidelines.
Finally, a personal motto is, “In volatility, there is opportunity!”

For more on related subjects, readers are encouraged to check out:

Disclosure(s): short VIX at time of writing