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This market really is trying hard to recover but it seems every time any momentum starts to build, another obstacle surfaces.  The new trade we opened yesterday is a simple option play that profits if we do indeed bounce off that 200-day moving average and finally recover from this recent ugliness which is the higher probability outcome at this point.

The S&P 500 was up nearly 2% at one point in yesterday’s session but a bad news headline in the afternoon and it crashed down 1.5% and barely closed positive.  It’s off to the races again today but we’ll see.  It feels like investors are walking on egg shells around this market lately as to not wake the bear again…

1 year S&P 500:

What isn’t recovering yet though is the volatility complex.  That 115% single day VIX index spike on Feb 5th and the fallout afterwards has had some lingering effects.  VIX futures are still comfortably in backwardation and the typical relationship that I often site is still completely inverted:

Normal:  M2 > M1 > VIX > VXST

Current:  VXST > VIX > M1 > M2


We’ll see how much longer this can last.  This is the 2nd streak of backwardation in 2018 that’s lasted longer than 10 days which doesn’t happen very often.


Here’s the current M2 : M1 contango / backwardation situation thus far in 2018:


Volatility is mean reverting in the medium term and does have a long term bias towards contango, so unless any major surprises or new developments surface over the next few days we may see some further normalization happening.


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