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Volatility Survives (For Now) The Same Old Chop

By Dr. Duru Market OverviewMay 28, 2015 05:01AM ET
www.investing.com/analysis/volatility-survives-(for-now)-the-same-old-chop-253213
Volatility Survives (For Now) The Same Old Chop
By Dr. Duru   |  May 28, 2015 05:01AM ET
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T2108 Status: 45.0%
T2107 Status: 51.3%
VIX Status: 13.3
General (Short-term) Trading Call: Neutral.
Active T2108 periods: Day #151 over 20%, Day #110 above 30%, Day #1 above 40% (overperiod, ended 1 day below 40%), Day #3 under 50% (underperiod), Day #21 under 60%, Day #220 under 70%

Commentary
Today delivered a great example of how the stock market does NOT respond the moves in the U.S. dollar index. The U.S. dollar ended the day flat, yet the S&P 500 was still able to recover most of its losses from Tuesday. On that day, the surge in the dollar was supposedly responsible (or at least correlated with) the plunge in the stock market. It stands to reason that mainly dollar weakness could return the S&P 500 to the previous level.


close-up of S&P 500 using SPY
close-up of S&P 500 using SPY

This close-up of the S&P 500 using the SPY ETF shows most clearly the complete reversal of the prior day’s loss

T2108 also bounced sharped but did NOT recover all its loss.


T2108 bounces smartly off the bottom of its trading range
T2108 bounces smartly off the bottom of its trading range

T2108 bounces smartly off the bottom of its trading range

Of course, this bounce also reversed my gains from the previous day’s trade on volatility. Interestingly, the volatility index, the VIX, only lost about half its previous loss. So it is still very possible that the path going forward is higher volatility.

If the currency market has anything to say about volatility, recent gyrations are telling me that the waters are getting rougher. Attracting my attention big time is the sudden renewed weakness in the Japanese yen (FXY). Presumably, yen weakness is still considered bullish for carry trades that support asset markets. However, the sudden reawakening does not seem to have a palpable catalyst.


USD/JPY Chart
USD/JPY Chart

USD/JPY suddenly breaks out to fresh multi-year highs – a fresh continuation of 2014’s sharp weakness?

I am seeing other jitters in the currency market with sharp lefts and rights happening without warning or palpable catalyst. We only really have follow-through to last week’s U.S. Consumer Price Index (CPI) as a prime driver. So, even if the S&P 500 makes another one of its 2015 classic new marginal highs, I am sticking by the long-volatility trade as a way to stay prepared for “something” happening out of nowhere.

One stock that looks like an accident waiting to happen is Shake Shack (NYSE:SHAK). Last Friday, it printed a classic topping pattern (a spinning top) that was confirmed by a gap down that has turned this pattern into an “abandoned baby top.”


Shake Shack (SHAK) Chart
Shake Shack (SHAK) Chart

Shake Shack (SHAK) has had an incredible run-up from its breakout point, but it has now lost 21% in two days.

Michael Seneadza
Michael Seneadza

According to Yahoo! Finance, SHAK has 37% of its float sold short. So the bearish trade is already quite crowded (and right I think). Another friend wrote a great theme piece explaining how SHAK represents everything bad AND good about this market – see “Shake Shake Shake: The Shack Shack Metaphor.” Ironically, given the expense of staying short, I would not be surprised if SHAK rebounds soon as shorts look to lock in profits or take this opportunity to reduce losses ahead of getting charged more exorbitant margin rates.


Daily T2108 vs the S&P 500

T2108 vs. the S&P 500 (DAILY)
T2108 vs. the S&P 500 (DAILY)

Black line: T2108 (measured on the right); Green line: S&P 500 (for comparative purposes)
Red line: T2108 Overbought (70%); Blue line: T2108 Oversold (20%)


Weekly T2108


Be careful out there!

Full disclosure: long ProShares Ultra VIX Short Term Futures (ARCA:UVXY) call options, short EUR/USD (net short the U.S. dollar), long an Apple Inc (NASDAQ:AAPL) call option, long iShares Nasdaq Biotechnology (NASDAQ:IBB) put options

Volatility Survives (For Now) The Same Old Chop
 

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Volatility Survives (For Now) The Same Old Chop

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