Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
While the market has advanced in very minute fashion this week, each day has been a grind. We’ve seen morning selloffs all three days, followed by afternoon rallies. Each morning the selloffs have become more pronounced in intensity. For those trying to ‘catch the turn’ these have been incredibly tricky, since one would think at such overbought levels we’d be able to put in at least a negative session. Monday’s and Tuesday’s selloffs even had small gap downs to start off the day. But no soup for you….
At this point the dip buyers are so trained in Pavlovian fashion, that the S&P 500 has not even been able to fill the gap from Friday’s employment data. So we can look at this in one of two ways, both accurate. On the bullish side, this market is in full teflon mode. It jumps, bases for 3-7 sessions, then jumps again. We are seeing this pattern again – after Friday’s jump, we’ve had three days of basing, although this basing has shown more weakness than the ones in January. On the bearish side, investors have the potential to be “set up”. Anyone adding hedges/shorts on these morning pullbacks thinking there is more to go, has been scalded repeatedly as the intraday action reverses within an hour or two. So what do you think is going to happen when the real reversal happens? After being scalded over and over, one will be reticent to put one’s finger on the hot stove again since after all, the market can only go up and each hedging technique is akin to throwing your wallet down a deep, dark well. Most likely the moment the downturn is real, those investors will be lacking the exposure to the downside, thinking it’s just going to be another reversal upward within hours.
Despite the lack of movement at the index level at the end of the day, it has been an interesting week intraday. I’d also point out that the death trap that is the VXX ETF (which only “loosely” tracks volatility due to its construction) has potentially bottomed here. The past two days it is in the green and has held a floor for the past 3 sessions. Maybe something, maybe nothing. But certainly this market is doing it’s best to drive some of us up the wall. 🙂
Of course the next interesting question (someday) will come once the selloff actually arrives: How sharp will it be? “Everyone” wants a nice 3-5% type of shakeout so they can buy what they missed out on. Will it be that easy?
Disclosure Notice
Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund’s holdings at the end of the prior quarter, visit the Paladin Funds website at http://www.paladinfunds.com/holdings/blog
