Mid Summer Momo Update

It is hot and it is humid over here in Valencia. You want to know how hot? The other day a poodle’s tail caught fire just waiting in the sun. The more frantically he was wiggling his tail the brighter it burned.


2016-07-25_summer_beach-1000x562A time for quiet contemplation of the bright blue sea… while next door, the poodle burns!

Photo via piktpool.com


Fortunately his master was nearby and was sweating so much (overweight Brit) that he was able to put the fire out with his bare hands. True story!

Well, maybe not – but that’s definitely how it feels over here. Fortunately the evil lair is equipped with an industrial strength A/C unit which will continuously run on its polar bear setting until late August. If the power goes down I’m dead meat as I have a high tolerance for heat but a very low one for humidity.

Alright, so I don’t really feel like putting up setups today, in particular since most of you guys are either on vacation or too lazy to actually pull the trigger. Let’s do a mid summer momo update instead – we’ve got interesting developments on all fronts and if you’re holding long here then you may want to pay attention.

Simple stuff first – realized volatility. Take a look at the blue squares I highlighted on the chart above. Each time we are seeing an explosion in RV – twice to the downside and the most recent one to the upside, burning any remaining bears into potash.

What interested me the most is what follows, during diminishing volatility back below the normal range of about 100 and 50.  Back late last summer equities whipsawed around but eventually corrected to the upside. Lather, rinse, repeat early this year after we touched the ES 1800 mark.


1_volatilityES daily: Patterns of volatility contraction on post sell-off rebounds – click to enlarge.


A Fork in the Road

Now look at the current ‘corrective’ RV period and what price is doing: It’s continuing upward, which essentially is bullish as frogsleggings (don’t ask).

However, it’s also fairly clear that this leg higher has seen its best days and is on the verge of either: a) blasting higher and painting an exhaustion high or b) starting to correct soon. So which will it be?


2_VIX_VXO-840x758The VIX/VXO ratio (VXO is the old version of the VIX, which measures the volatility of OEX options, i.e. the index that represents the 100 SPX stocks with the largest market caps. The ratio between the two measures has been useful in delimiting turning points on previous occasions. Its range has shown a tendency to expand between two diverging trend lines over the past few years – click to enlarge.


I’m glad you asked. Although I don’t know the future either I am pretty good at narrowing down possibilities. Right now today we’re about at the 50/50 mark but that one is quickly shifting as we are pushing into the ‘sh*t or get off the pot’ phase.

Look at the VIX:VXO ratio above. There is definitely space left to run but we are starting to run out of oxygen here and the sherpas are looking concerned and are whispering to each other. Probably debating which part of me they will be eating first.


3_VXO-840x768VIX and VXO – both have dropped sharply – click to enlarge.


Above is the VXO on top of the VIX and as you can see, both of them are dropping into the abyss here. These are prime conditions for a final blast higher, but it needs to happen this week or gravity will exert its influence. You can only keep mooning folks for so long until someone decides to give you a spanking.


Charts by: Ninjatrader / Evil Speculator, StockCharts


Chart and image captions by PT


This article was penned by the Mole and appeared originally at the Evil Speculator.




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