Occasionally I still get the impulse to walk through the doors of 86 Trinity Place, pass through the members lounge and down the escalator, go to the coatroom and trade my suit jacket with Dave for my traders jacket, walk to the back and exchange pleasantries with Mike as he gets me my floor shoes, and head upstairs………… When I play this scenario in my head, I actually get butterflies in my stomach, something that rarely happened when those steps were routine, but were always there when times were turbulent. Today is one of those days for me……..
The markets have had a nice rally from the lows in January and September, but neither rally has been able to vault over 18,000 (of course this one may not yet be finished). But from a risk reward standpoint, I feel compelled to put that jacket on and state a case. Ignoring taxes, a sale at DJIA 17,500 (futures are 17,540 as I write this), with the intention of getting back in if new highs above 18,350 puts about 800 points of profit at risk. Support, in my humble opinion is 14,000, though I think that lower is likely (I don’t think a crash like 2008/2009 is in the cards, though the fear of it will help create the bottom). So, the way I see it is that your risk / reward ratio is 1 / 4+ in getting out. Of course, some will want to bet on the downside (I don’t recommend that unless you are a professional, and a nimble one at that). The white line on the chart #1 (DJIA Weekly) below is the 200 week moving average. That held and stopped both declines recently, but I think it gives way if we get a third time down. Support then becomes around 14,000, the top of the bull market in 2007. Fear of an 08/09 repeat probably send a spike through it, which could be for hours or months.
Chart #2 is the VIX, also known as the Fear Index. It basically charts the cost of insuring a portfolio against a major move in price. Options are the insurance and VIX measures the relative cost of those options. Imagine a chart of the cost of insuring your beach house in the Rockaways. Each of the spikes upward represent a hurricane heading up the coast that may turn out to sea….. or may not. As the hurricane gets closer to shore, the urgency of getting insurance (for those uninsured) increases dramatically. The same thing is in evidence here. As a decline, or fears increase, and the chance of a crash appear more real, those at risk will pay more to insure against it.
Most of the time, it’s good to be an insurer as the cost of the insurance just decays. In fact many feel that the only option worth owning is an overpriced one. While that is debatable, it certainly can be observed that owning protection when costs are rising can be very profitable. Moves in VIX between 10 and 20 appear to be just noise, and buying insurance and waiting is very costly. But owning insurance during periods of increasing fear can be very worthwhile. Often moves above 20 in the VIX result in spikes much higher. We are not there yet, but this month’s punch above that 200 week moving average (the white line on the VIX chart), along with the chart formation on the DJIA chart has my eyebrow raised, both of them in fact.
A few years back I wrote a blog post for The Traders Jacket called VIX and Viagra. It starts out basic, may end up a bit complex as it progresses for the non-professional, but I think it’s a good read. There is a typo or two, please ignore as I must have been bleary eyed when I wrote it. Here’s the link if you are interested…….. http://thetradersjacket.blogspot.com/2012/05/vix-and-viagra.html
My advice: Be careful out there, and don’t go swimming in the proverbial ocean! 18,500 in the Dow and I’m wrong.
Timestamp 7:35AM EST
Nasdaq Comp 4,852
DJIA Weekly 2007 - Present
VIX (The Fear Index) Weekly 2007 – Present
This is not investment advice. Raymond (Randy) Reis III and or ReisNYC is/are not registered investment advisors. Under no circumstances should any content from any productions by Reis be used or interpreted as a recommendation for any investment or trading approach to any markets inclusive of real estate. Trading and investing can be hazardous to your wealth. Any investment decisions must in all cases be made by the reader or by his or her registered investment advisor. This is strictly for educational and informational purposes only. Mr. Reis may have numerous positions within the market at any given time that are not disclosed of at the time of publication. All opinions expressed by Mr. Reis are subject to change without notice, and you should always obtain current information and perform the appropriate due diligence before making any investment or trading decision.
All efforts are made to ensure that the information contained is factual and accurate - however, Mr. Reis does not guarantee its accuracy under any circumstances.
Note: Originally Posted 4/8/2016 on previous website.