Today is the third day in the last week and a half where a strong day of buying the previous day was met with an equally strong sell off. It’s the first time in a while where there is a legitimate battle being fought between the bulls and the bears.
Now what’s been very interesting to me has been how well behaved the volatility markets have been given the magnitude of some of these single day sell offs. It’s been mostly restricted to short term metrics being elevated but little actual fear that this will be a long lasting downtrend. On the other hand we do have to go back a few years to see this many > -2% down days so again, it’s a back and forth battle.
I always just focus on the metrics and the math but if I take a few steps back and try to interpret what they are telling me, it’s hard for me not to conclude that the market really does want to recover here. We can’t front run anything because it’s quite dangerous to be in any positions right now, but the volatility metrics do seem to be betting this will dissipate soon.
Keeping political talk to a minimum, but this recent bout of selling seems to be correlated to the rather alarming protectionist tones coming out of the White House of late. There have been some specifics on various tariffs levied both by the United States and by China in retaliation, but nothing that’s very meaningful just yet. I guess we could call them warning shots and the market has responded with a warning shot of it’s own. I’ll try not to sound like Yoda when I say this but protectionism leads to uncertainty, and uncertainty leads to a flight to safety. If the rhetoric continues we could see a break below the 200 day moving average and if that happens I would imagine the volatility markets will kick into high gear and we will get some stronger signals to perhaps start taking the other side of the market. Right now we’re in limbo, comfortably in safety positions across the board, but that could change in a single day so stay tuned.
(and let’s hope China doesn’t start reducing US Treasury purchases in response…)
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