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The "Crazy Ivan" Playbook: How To Time A Near-Term Market Bottom
From Nick Colas of Convergex
Just when you think the selloff couldn’t get any scarier, it did. The last hour of trading took over 1% out of the S&P 500 in rapid fashion, reportedly on fears of an Ebola check at a major U.S. airport. Today we offer up a “Top 10” list of specific markets and indicators to watch for signs of a near term market bottom. They include the CBOE VIX Index (key levels at 26 and 32), the action in small cap stocks and crude oil, and the dollar. Less quantifiable issues – but important nonetheless – are headlines related to Ebola (probably getting worse before better), 10-year Treasury bond yields (2.0% and 1.5% possible here), and European policymakers addressing a host of difficult monetary and fiscal policy issues. Bottom line: this is unlikely to be a dramatic “V-bottom” low given the range of issues of concern to investors. Look for the majority of our “Top 10” to stop going down before calling a bottom.
“Too late to sell, too early to buy”. That old market aphorism captures the current state of play in U.S. equity markets and to a great extent stocks around the world. Today’s selloff, on a supposedly light volume half-holiday with U.S. bond markets closed, felt like a brick thrown through a window at about 3pm. Those with a technical inclination to their analysis don’t like the fact that the S&P closed below its 200 day moving average of 1905. Fundamentally oriented investors wonder how stocks could implode when they are so “Cheap”. Safe to say: no one is happy.
Another bit of market wisdom, told to me by the smartest (and richest) boss I have ever had: “Don’t make things harder than they have to be.” That statement is the essence of good trading: listen to the market, respect what it has to say, and position capital accordingly. Investing, by contrast, is a bit of a hair shirt and ashy smudges on the face endeavor. Investors know they will feel some pain when things go against them. They stick with their positions and hope/expect them to prove correct. Traders know that that if they are feeling pain, something has gone wrong.
Right now, the discipline of the trader beats the faith based approach required of the investor, so let’s go with that. And hair shirts make me itch. “Sit tight, be right” is for analysts. And bull markets.
Here’s a checklist of ten items that I’ll be watching to tell me when the bulk of the selling is over. Yes, that implies we haven’t hit bottom. Does Monday’s price action feel like a bottom to you?
1. The CBOE VIX Index. Yes, the VIX gets its share of criticism, but in rapidly moving markets it has its place in the toolbox. The long term average – back to 1990 – is 20 and the standard deviation around that mean is 6. That means at 26 and 32 you have 2 reasonable levels where the VIX should top out. Now, if you think we are entering a period of real crisis, the numbers shift higher. Typically the VIX averages 28 when things are really bad (think back to the Financial Crisis) and the standard deviation rises to 8. That puts the target at 36 and 44.
Bottom line: don’t try to pick a bottom until the VIX gets to at least 26. It closed at 24.6 today. If you aren’t especially brave, then wait until 32-34.
2. U.S. Treasury Bond yields. The U.S. Treasury 10 year yield has been signaling trouble for stocks over much of this year. We began 2014 at 3.03%, and there hasn’t been a day this year where yields traded higher than that. For a while, equity markets treated bonds as the “Boy that cried global recession” once too often. Now, persistently low yields feel pretty right.
Where might yields go to signal that near term negativity is overdone? Well, the all-time low in yields for the 10 year was 1.5% back in July 2012. Getting back there seems a stretch, so as a practical point we’d say investors will want to see yields start to rise (from whatever starting point they choose) before they believe stocks have bottomed.
3. Small cap U.S. stocks stabilize. There is little doubt that the U.S. economy is in a marginally better position than Europe or Japan, but the Russell 2000 is down 10% on the year and meaningfully lower than the S&P 500 since the start of 2011: 34% versus 49%. All that signals both a reluctance to take risk (small caps being more volatile than larger names) and some squeamishness to allocate capital to equities with all-or-most of their business from the supposedly stronger U.S. economy.
The bottom line is simple: small caps need to show better performance to give investors confidence that we have made a bottom in large caps. Enough of the divergence – both asset classes have to start acting more consistently with respect to their common fundamentals.
4. Follow the ETF money. Equity money flows into U.S. listed exchange traded funds have been quite disappointing thus far in October, at negative $5.7 billion. By contrast, fixed income money flows are positive $8.2 billion. ETFs alone cannot lift equities higher, but you will want to see money flowing into this space before you ring the all-clear on the recent pullback.
5. Crude oil prices. Just as Treasuries gave us a warning sign that things weren’t quite right with the world, current levels for West Texas Intermediate at $85 are a flashing yellow light as well. Yes, there are a host of secular reasons for lower oil prices – Saudi Arabia pumping more, the U.S. producing more, etc. But oil prices are the blood pressure readings of the global economy, and the correlation is positive – not negative. So oil needs to stabilize, somewhere. The $80/barrel level is a good one to watch, as the commodity got there in 2011 and 2012.
6. Any Positive Headlines from Europe. Between all the news about Ebola, ISIS, capital markets volatility and other more pressing concerns, it is easy to forget that Europe still has its hands full dealing with the threat of a third recession since the Financial Crisis. This region is still, one should remember, the largest single economy in the world. And yet… It has no solid plan for encouraging investment and growth. Remember when the Dow fell +700 points after Congress failed to pass the TARP bill the first time? The current market volatility may give European policymakers the same impetus.
7. The value of the dollar. The fashionable discussion here is whether a strong or weak dollar if better for stocks. We could argue either. The real issue is just how volatile the U.S. currency has been, even including today. In truth, what we need to see is a stable dollar at whatever level it chooses. That will be a sign of a bottom, in that investors will have set some kind of equilibrium from which they can begin to choose between different asset classes.
8. Higher volumes. Much higher. We do appear to have snapped the 5 year downtrend for U.S. equity volumes with the recent volatility. Look for trading volumes to continue to rise in the coming weeks. As will the dollar, oil, and small cap stock levels, whenever volumes plateau that will be a good place to call a bottom.
9. Hedge fund chatter. The current price churn is really good news for your garden-variety equity hedge fund because it changes the game they will play for the next few weeks. As a hedge fund, you typically want to make as much of a return as possible, since this drives fees and attracts new investors. In a down year – like the one we now have – the goal is to lose less than other hedge funds. That means cutting back the portfolio as markets decline to minimize risk of loss. Do it quickly, and you will lose less than the next guy.
While we don’t know which unlucky hedgie will actually do this trade, I can assure you that the bottom tick of the current pullback will be from some hedge fund letting go of their last favorite – but losing – stock position. So look for signs of distress in the hedge fund community – perhaps including chatter of a high-profile closure or two – as a signal that stocks have actually hit their low points.
10. Ebola, ISIS, and other risk factors. I saved these points for the last because they merit the final word on the topic of “When do we bottom?” If you believe ISIS will sweep the Middle East or Ebola is a large scale threat to human existence, you really shouldn’t be in equities. Or bonds. Gold, Glocks and canned food should be your thing. And there’s absolutely nothing wrong with that.
However, realize that the Middle East has been a mess longer than just the arrival of ISIS on the scene. And Ebola is just one more stanza in the sad song of diseases that kill innocent human life. For the moment, however, fear has the upper hand and we have to respect that. That’s why this list has 10 items, rather than just this last one. “Ebola cured” or “ISIS defeated” are not going to be headlines in 2014. Or likely in 2015 or 2016 for that matter. The other nine of our top 10 will have to deliver the signal that these larger worries are discounted in stock prices.
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One Ping!
When does participating in the schemes you know are criminal and frauduent go from a moral question to a legal one? Far as I'm concerned, if you're dancing with the Devil, you deserve to burn.
And a LOL when the imbecile in the video says, "The airlines are down today on no news at all..."
Markets are no longer a moral question. I save that for family and friends.
There is nothing but loss to be had for 99% of muppets.
I don't play.
Right full rudder, reverse starboard engines.
This engine? you find the reverse switch - it's inside.
Hilarious to hear discussion of "market bottoms" at this early stage, but not surprising.
Elsewhere: NBC alarmed as even some liberals no longer believe Islam is 'religion of peace' http://tinyurl.com/o9xar3h
Well, if we were to take the actual Behavior (what they Do, not what they Say) of Mobster or Zionist 'Christians' or 'Jews', then you'd have to concluded that their religions are not religions of peace either.
And you certainly can't conclude that, when you're talking about "Christian" US/NATO soldiers fighting, shooting and bombing places and people far away from home. You simply can not -- not w/o being a World Class phoney and hypocrite.
When was the last time you heard of the "Mobster Zionist Christians us/nato" behead someone in the name of Christ? Quit appolgizing for the Islamic "cult".
Iraq, when they piled bodies like cordwood, took pictures on top of the bodies while smiling & laughing, and raped little Iraqi girls in the name of their christian gawd and Murrika Freedumb.
You're wrong kirk. You have to pick a team like you're told. If you pick another team, you're a traitor. If you argue, you're a terrorist. Now turn on the television, microwave your lunch and join the other million fuc...In morons.
"Religion of peace" is newspeak. All religions are by definition "religions of control". It's their raison d'être.
This fucking guy is assuming that we are dealing with a free and open market. What part of "THE MARKET IS FUCKING RIGGED" does this clown not understand?
When individuals invest so much (ahem - sound familiar?) in a skill set, they are loathe to walk away from it and start over. Let's say one is a sailor and after some years of sailing, realizes this isn't the best lot in life. Is the sailor really going to *start over*, become a beautician, stare down women's shirts all day, find out which ones cheat on their hubbies, and then do what sailors do best?
Most folks hang on to their professional life with great effort rather than walking away and seeking opportunity elsewhere. It usually takes being fired or simply displaced.
And how many here on ZH *really* think there are going to be lots of opportunities in the markets in 10 years? Insiders will always be insiders, but I think the financialization industry is simply going to run out of oxygen at some point and implode. With it will go all the pensions, retirements, savings, etc.
Regards,
Cooter
"With it will go all the pensions, retirements, savings, etc.
Do we then have to wait 10 years for the pitch forks to come out? Shit!
I for one think there will be lots of opportunities in the markets over the next 10 years. And while it's true that insiders will always be insiders, it's also true that sound companies that have a product or service that's in demand will continue to do well and are worth investing in. Just not right now, given the crescendo of manipulations that are climaxing at the moment. But there will be opportunities going forward. Keep your powder dry and your eyes open, hedge your bets, and never gamble more than you can afford to lose.
Get real. People change careers all the time. Used to be the average wage earner worked in 4 different fields in his lifetime.
While what you said is true you left a crucial piece out. Once your salary becomes significantly higher than entry level it is very hard to change career paths. Been there and there is no way to take 50% pay cut while paying child support and alimony.
Easy solution: never put yourself in a position ever to pay alimony or child support. Some of us are smart enough to keep it wrapped & never wife-up a parasite.
Reading the markets is less about math and more about reading the mind of a 5 year old.
damn, so that's why I suck at reading markets, even though I can do math
maybe I should observe playdo instead
When the Croupier asks that the dice be changed is not a good time to place a big bet at the craps table.
ISIS is a golem named Emmanuel Goldstein.
The ladders have all been broken down for firewood and all that remains are the snakes in the grass, those unfortunately are plentiful.
Can you imagine what SHIT lies lurking on dem cooked books? However bad this show is you can be certain it's 10 times worsererrr.
Hay I scared myself
I'll call a bottom when the Fed is ended and banksters are dangling from Wall St lamp posts....not a moment sooner!
And for all those guys who got wiped out selling vix calls because they were certain yellen had their back, under the impression that nothing short of full on thermonuclear war would even register a blip in volatility, what about them..
I aways buy stocks on the bottom half of the hour.
Bottom or top? You get decide how you will be screwed by Wall Street.
Only chimps pick bottoms
https://www.youtube.com/watch?v=ege_nHPQhqs
What the algos are thinking:
Must. Crush. Vol.
Not enough Red October quotes
The hardest part about picking bottoms is knowing when to flinch.
'Multi engine turbo prop....torpedo in da water"
"Ruskies don't take a dump without making a plan"
"I think I will need 2 wives"
The problem with "sit tight, be right" is that you never book your winnings. You're always letting them ride, so one major loss destroys your capital.
Picking bottoms or tops might be a very tough call, but "buy low, sell high" is still the formula for success in the markets. You don't have to call bottoms or tops, but you have to know when the odds are in your favor or against you, and act on that knowledge.
It's pretty easy to create a spreadsheet which will tell you what sectors to buy and sell, enforcing buy low sell high.
Ya. Long inverse ETF's with low share prices & high leverage at a top.
Long banks stocks & market ETFs with high leverage at a bottom.
Holding gold, silver, meds & tools at all times and stored food.
I don't short and I've given up on the VIX. I don't have the cash or the nerve to hold on to losing positions for months while knowing full well that the FED or any other central bank can sum N=0 -> N=infintiy at any instant.
p.s. No Unicode?
Already in HVU well in advance... LULZ.