Market Slice: Does a Bear…?

 

What to expect in this week’s Market Slice:

• The bear market continues to move downwards, keeping the bear market alive and taking a plummet to some stocks.
• What triggers can cause a market crash.
• Asymmetrical trades and how this risk-to-reward is really starting to pay off!

A Bear is a Bear

A bear is going to do what a bear does. And similarly, this bear market resumed its downward trajectory, starting with a big selloff on Friday.

The gray box highlights the price action from the cycle high in the S&P 500 of 4631 on March 29, through the cycle low of 3666 on June 16, to the recent test of resistance at 4200 (horizontal gray line) and Tuesday’s close at 4128.

Most notably, the rally ended right at the 200-day moving average (blue line). Failure to break above this line is a bearish indicator.

As we wrote on July 22, bear market rallies regularly punctuate the overall downtrend… There were six rallies during the 2000-2002 dotcom crisis bear market, and five during the 2008-2009 Global Financial Crisis. Compare the chart below to the following 9-month chart of the S&P, which shows the entire “bear Market of ’22 to date:

Here’s a follow-up chart from analyst Michael Kantro, analyzing this year’s bear:

The Index was at 4796 on January 3. It fell to 4170 on March 8. Then it rallied back to 4631, erasing much of the winter losses. That high, though, was followed by a steep plunge. Then we got this recent rally. It’s also worth noting that the significant 4200 level was breached, but the bulls were unable to sustain momentum and keep the price above that test level. Prices broke down back through 4200 in dramatic fashion on Monday. This is another strong sign we are still in a downtrend. Of course, the real question is, what’s next?

Remember this list of potential crash triggers from our April 7 issue?

• Inflation at a 40-year high
• Hawkish central banks
• The specter of nuclear war
• Ongoing supply chain disruptions
• Dramatic China slowdown
• European recession risk
• Yield curve inversion
• Waning financial stimulus
• US recession/stagflation risk
• SPX bearish “death cross”
• Commodity spike
• COVID spike
• VIX spike

Nothing has changed in the underlying economic fundamentals, and only the COVID issue has receded in significance (except in China, which matters due to that nation’s central role in global production). Therefore, we see no reason to conclude anything but that we are still in a bear market, and the likely direction, even in the short run, is down.

Asymmetrical Trades, Revisited

Did your Spidey Sense start tingling when the VIX dipped below 20 last week?

Unlike our web-slinging hero, traders can sense opportunity with a well-developed 6th sense that alerts us to asymmetrical opportunities. Asymmetrical trades are those where the risk-to-reward ratio is skewed, meaning there is a greater chance of gain than the risk of loss.

Our favorite asymmetrical trade this year has been long the CBOE’s S&P 500 Volatility Index, the VIX. We first pointed out the opportunity in this trade on January 5. At that time, before the bear market started, the VIX was hovering around 16. We argued that VIX simply did not have much room to go down, given the uncertainty that was already in plain view, and might very well rise substantially on any adverse developments.

Within three weeks, VIX had spiked over 30, providing a nice profit for anyone who saw the value we were pointing out at the time. (Note: Market Slice does not provide investment or trading advice. Our research recommendations are provided entirely for educational purposes.)

We made the point again in our April 7 issue, two days after VIX bounced off a low below 20. In that case, we were almost too late to let readers know about this setup… when we wrote on Tuesday of that week, VIX was at 19, but by the time it reached our readers, it was above 21. Nonetheless, after two weeks of sideways chop, the price broke to the upside, going to 35 by early May.

This time, the VIX gapped up on Monday, and as we write on Tuesday the VIX is already at 24, so the risk/reward ratio is not as good as it was last week.

There is still reason to believe there is more upside than down in current VIX prices, but the point of this article is simply to remind you to stay alert. When the markets you follow present an asymmetrical opportunity, you want to move quickly. This is why many traders subscribe to daily signal services from top professional traders. You may be too busy to monitor the markets on a daily basis, or just don’t have the interest.

At FFR Trading, we’re here to help you. We can connect you with traders who are successful in every kind of market – up, down, or sideways – and with all different types of instruments: stocks, options, commodities, ETF’s, whatever you want to trade. This is also why we are introducing our new Concierge service, right after Labor Day. If you haven’t signed up yet, you can get on the announcement list here. When you sign up, we’ll even send you a free copy of our e-book, How to Avoid Getting Burned in the Markets (a $20 value!)

With Concierge, you’ll get important updates in between Market Slice issues. For example, we would send an alert when the VIX drops below 20, instead of waiting to tell you about it a week later!