What Does the Volatility Mean?

“All the perplexities , confusion and distress in America arise, not from the defects in their constitution or confederation, not from want of honor

Or virtue, so much as from downright ignorance of the nature of coin, credit and circulation.” – John Q. Adams

They say may you live in interesting times.

They also say be careful what you ask for.

The times are not just interesting, they are downright bizarre.

For example, the long bond yield has gone negative in Germany.

You pay for the privilege of loaning Germany long term money.

Thanks to years of monetary intervention among the world’s central banks causing artificial asset price inflation,

America’s richest 0.1% control more wealth than at any time since 1929.

The price discovery mechanism we call the market has become infested with robos, quants and algos… all enablers of the almighty incestuous corporate buyback which beams up earnings illuminated in a hologram of stock prices.

Risk has been priced out of the market because volatility has been suppressed.

Like a snake eating its own tail, it is reborn giving us volatility within volatility:

We don’t just have extreme volatility from one day to another— volatility has metastasized into a night scavenger and an intraday hyena. Any twitterpation or beautiful letter or lovely phone call can set the market careening.

Is this a stock market or a self driving clown car in a fun house of mirrors?

I started trading exactly 37 years ago in August 1982. Despite the shards of computerized strategies distorting the tape, I find it remarkable how the same trading patterns I developed and have been using for more than 25 years are still my bread and butter…be it for day trading, swing trading or position trading.

The bottom line is you need a method to recognize the signs of when a stock starts to move so you can get in early…on whatever time frame you are trading.

That said, due to decimalization, most of my strategies have to be tweaked so as not to get shaken out intraday.

At the end of the day, as Jesse Livermore said, “There is nothing new in Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again.”

Because it is people that make the stock market and human nature doesn’t change over time.

It is still people that have written the programs that drive the robos and the way people react to changes in the stock market will never change.

The chart below depicts these human nature emotions that dominated investor thinking at each of the respective times.

It may seem difficult to imagine a time when greed will peak because it has been predominant so long. That’s why these reminders are so important. Markets make their tops during good times. Investors don’t feel like selling because they are in good times and those who have been advocating taking profits have been discredited and sacrificed at the altar of buy the dip.

The news media is of no assistance in this process. Nor is the financial community.

The 19th and 20th centuries in America were splattered with the blood of men who went broke during a series of various speculative orgies.

These were centuries of dramatic panics, which in many cases were directly the result of government interference. Contrary to general belief, America has never been total laissez-faire, far from it.

Government has never left America alone from the beginning of its financial history; rather it has intermittently tried to ‘help’ things along, invariably with disastrous consequences.

The current century has seen two dramatic episodes of panic in the first 10 years.

One of the reasons the Fed was formed in 1913 was to prevent panics. However, they simply took away from the big financiers their job of controlling stock purchase and money supply and took on the job themselves. Government then proceeded to “solve” problems in exactly the same way as the fig financiers did: easy money.

Bull and bear raids that led to panics were not eliminated by government regulation, they just took a more sophisticated form.

Stock market panics come without warning—or so say the books on the subject What this really means, of course, is that the majority of people, as always, did not read the signs and THEY lost money.

In this sense all panics come “without warning”—it’s the element of surprise that makes people act first (panic) and think afterward.

If you know what to look for and know what to listen for the signs present themselves.

Of course to a blind man on the Titanic, the sound of the violins meant a party was going on.

Above I mentioned that America’s richest 0.1% control more wealth than at any time since 1929.

There are other similarities to the summer of 1929.

December 2018 to July 2019 saw the most violent market rebound in history.

Arguably the 10 year advance from 2009 has been itself a remarkable rebound as can be seen in the above chart.

The Roaring Twenties in some ways was a remarkable advance to the depression of 1920 to 1921 that lasted 18 months.

The Fed, founded just 7 years earlier, failed to prevent the downturn.

Arguably, the Roaring Twenties was fostered by an easy money Fed that was reeling from the events of 1920-1921.This mirrors the Bernanke Fed, who as a student of the Great Depression, stated the Fed was wrong in the early 1930’s (by being too tight) stating, “We won’t make that mistake again.”

So in this sense the remarkable 10 year rebound following the Great Recession of 2007-2009 (that lasted 17 months)

Mirrors the remarkable 9 year rebound of the Roaring Twenties following the sharp deflationary recession of 1920-21.

This summer is the 90th anniversary of the top in 1929.

Maybe you think cycles are voodoo?

90 years before 1929 was 1839 and a panic.

45 years before 2017 is 1974 and the capitulation bear market low.

45 years before 1929 was the Panic of 1884.

The current tariff and currency war echoes this 90 year cycle.

1929 was a year ending in 9.

Years ending in 9 have some impressive history.

The current bull market began in 2009.

1949 was the beginning of a huge bull market that ran into the late 1960’s

The Over the Counter Market (OTC) peaked in 1969 and lost 83% of its value after it topped.

Conclusion: The market usually does a good job of providing hints when big turns are on the table.

The market is ricocheting out of control. Something seems broken.

Volatility precedes price.

The intense volatility we’ve been seeing may be trying to tell us something.

Most analyst are focused on earnings. Earnings are a lagging indicator.

You have to have a method to determine the primary trend, the Line of Least Resistance.

In the spring we warned a major cycle was due to exert its downside influence in July from just above the SPX 3000 region.We’re not going to go into our methods and reasons again at this time.

Suffice to say that the severe drop since then puts me on high alert.

After the break below 2880 SPX, a sharp rally took place on Tuesday.

We told subscribers it was a suckers rally and maintained our SPXS long position and laid out shorts.

The next month could be one of the most dangerous we’ve had since 2008.

Of course I could be wrong, but my advice is to play defense and look to capitalize on the short side.

If I’m wrong, you can get back in the market after September.

For those looking for the tools to navigate a turbulent tape and capitalize on the opportunity panic can provide, now is the time for Hit & Run.

The SPX topped on July 26th which as shown on the Square of 9 below is square the low 3000 region and the late October which of course was the crash on the 90 year cycle.

Maybe something, maybe nothing, but the date of the recent high squares-out with the crash in 1929.

It is to be remembered that the 386 DJIA price high in 1929 also squares late October

The green arrow is July 26th high

The blue arrow is low 3000 region

the purple arrow is late October

Caution is warranted.