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I trade volatility ETPs (SVXY, XIV, UVXY), S&P 500 through SPY, UPRO, SPXU, and invest long term in Dividend Growth stocks with high dividend CAGR values. Individual stock picking is a waste of time to me unless the company pays out large and high growth dividends. Macro mixed with... More
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    More and more people are speculating May 21st SPY was THE "Top" of the boom/bust cycle. There are a few different ways I have found to tell if this is true and a few correlation but not necessary causation signals as well. The big answer is maybe but very doubtful and honestly there is no way to know that answer for sure - yet.

    Some things to keep in mind.

    1. Market cycles end and start in March/October. Not always but especially the last 2-3 cycles that has been the case. Why? Not sure, it just seems to happen that way. May 21st is not March.
    2. The stock market rises on the year unless we are in recession. Data going back to 1950 bares this out. There are 4 exceptions and all of them had extraneous causes - 1994 - Fed did a surprise interest rate hike, crushed stocks and bonds at the same time. 1977 - Oil shock/embargo plus Fed tightened (bears will point to this one, kinda similar). 1966 - Fed tightened credit big time. 1962 - In May they had the 1960's version of a flash crash that shook investor confidence. Now there is no evidence the US is in recession yet but if Fed tightens maybe March of 2016 is the better candidate for a Top. 1977 bares watching because of some similarity to this year but lets be honest there are no gas lines or other major happenings that would put the brakes on our economy right now.
    3. The first time the Fed tightens in a rate cycle the stock markets go nowhere for a long time. This happens time after time. In 2004 there was no new high in markets for 8 months! This is the big one Bears/Top callers miss. If there was no potential 1st interest rate hike and stocks did not hit new highs for 4-5 months I might start leaning in their camp but this is a known commodity - when Fed raises rates stocks stay down for a long time 6-8 months.

    What would I need to see to get in the Bear/Market Top camp? GDP in the US accelerate to the downside, Fed raise rates/invert yield curve or more cycles of lower highs and lower lows especially if the Nov-Jan seasonality rally doesn't take hold. Then we have to pause and reassess but until then get long on extreme weakness and sell early on pops just in case.

    Tags: SPY, Market Top
    Sep 29 7:21 AM | Link | 2 Comments
  • 2015 Correction

    Or how I learned to stop worrying and love Volatility.

    First off I don't know how far down we will go and no one else does for sure. Period. All we can do is look at the most likely scenarios, have a plan for when they happen, be flexible to adjust the plan in case conditions change and execute the plan. What I do know is history tells me every single correction (except Oct 1997 -11.2%) since 1993 has had at least 2 legs to lower lows. 1st leg ended on 8/25 and we have yet to have a 2nd leg to lower lows (although Friday is likely the start of that 2nd leg lower).

    What else do corrections have? They have what I refer to as a draw within the draw. Big picture wise they go from a "Top" - "Bottom" - "Mid Top" -- "Mid Bottom" and then to new highs. I will use 2010 16% correction as my example. We fully bottomed at -16.1%, bounced to the Mid top of -7.2%, went lower to the Mid Bottom at -13.6% (notice not a lower low) and THEN moved to new highs. Top, Bottom, Mid Top, Mid Bottom - New Highs. This nature of a correction plays out over and over and over again if you look at historical corrections - I have charted the data back to 1993. The basic idea is the market hits pivot points where we are oversold/overbought compared to where we were - the market constantly over shoots and under shoots especially after a panic sell lower until finally after the Mid Bottom everyone decides to row in the same direction and the markets recover to new highs. Strange but true.

    So my premise is we have yet to hit our true bottom and are still in the bottoming process. Fine. How do we trade it? Well I would start buying UPRO once we close at a lower low - current low is 187.27 SPY. I can't give you the timing of it other than to say buy after we get to lower lows. Then you hold until we make a significant move back up towards the mini-top then sell and start shorting, hold until we reach the new mini-bottom - sell and go long again but this time XIV and hold until new all time highs.

    You are all probably going "wait a minute, I thought you were a Volatility guy not UPRO, why UPRO vs (NASDAQ:XIV) or (NYSEARCA:SVXY) until the Mini-Bottom?" The stats show during big draws of large backwardation (see summer 2011) UPRO outperforms XIV during the Bottom to Mid Top period (by 8.4%) AND Mid Top to Mid Bottom periods (4%). But XIV outperforms UPRO from the Mid Bottom to the new highs (18%). Why is that? Well in 2010 it was better to own XIV because Contango was strong throughout the draw - for goodness sake we had 6.4% roll yield and 4.2% contango on the day the SPY bottomed at -16% draw! So the contango wind was at your backs the whole time you were trying to pick a bottom. Fast forward to 2011 where average Contango during draw until bottom was -5.4% vs 1.5% for 2010 and you can imagine the tailwind vs headwind that contango plays for your XIV returns. By the time you hit the Mid Bottom though the market has decided we are not seeing lower lows, VVIX, VXST and VIX are lower than before and the futures curve reacts more normal then the panic it shows until then.

    Contango was -5.4% 2011, 1.5% 2010 and currently we are at -9% average contango for this correction- Yikes! Now by the time we bottom that average may fall some but no matter what it will be negative by the bottom so the play is definitely or (NASDAQ:TQQQ) until we hit the Mid Bottom.

    So on top of logic and history on your side you can also sleep better knowing if you buy UPRO at -14% and we go to -19% you will be down 15% as opposed to 2011 if you bought XIV (simulated XIV because it did not exist in 2011) the 2nd time the market got down to the -19.4% bottom you were down 44% in XIV!! Think about that. Market down 2% (6% if UPRO and you are down 44% in XIV. Horrible play! 9.25 to 5.12. I am not saying that would/could happen this time but I am showing you it is much better to be safe than sorry. And to sweeten the pot more here are the returns if you nail the Mid Bottom in 2010 and 2011 buying XIV and holding until new SPY highs - 89% and 70%. The returns from UPRO are Bottom to Mid Top = 32% and 51%, Shorting 3x (SPXU/SPXS) Mid Top to Mid Bottom are 21% and 29%. So it pays to be safe now with UPRO (you get BETTER returns in UPRO vs XIV with big backwardation) and then after we recover a bunch, then fall back down but not to a lower low THAT is when you buy XIV and rake in the big bucks.

    Good luck and happy trading!


    Btm-Mid Top

    Mtop -M Btm
















    Sep 06 3:44 PM | Link | 37 Comments

    Ok so it isn't a myth, they do exist but not as often as many claim. I don't know how people get their metric for 10% corrections but my method is from close to close using the SPY. I think everyone does that. But I also think they include say the last 20 years including the recession years. Once the market hits the market top and starts a full bear market down (recession) I don't think it is useful using those values during a recession to figure out how likely you are to get a 10% correction in your current bull market because a lot of 10%+ corrections happen during a 50%+ bear market recession. So when you compare apples to apples - Bull Market to Bull Markets - how often do 10% corrections happen?

    I focus on the last 15 years (the last two bull markets) for all my data and exclude the bear markets (recessions). Using those metrics you get the following:


    So as you can see you get a 10% correction about every 44 months on average or ~ every 4 years. Not very often at all. And if you go a step further, we have already had 2 corrections in this current up cycle which means historically speaking we have already reached the maximum number you would expect before the market peaks. So purely statistically speaking we have a very low chance of a 10% correction BEFORE the market tops - this is the exact opposite of every claim I see out there that we are "due" for a 10% correction.

    There is one other thing I have noticed in the last 15 years. There are always large(ish) draws (6%-9%) happening right before the 10%+ correction. Never a gap between where you had say a 3%-5% draw small draw and then the big 10%. Each and every time there is a 6.4% or larger tremor draw before the large earthquake 10%+ draw. So it seems the markets give you a warning before the big one. I have not heard or read a single person state these facts before.

    Now despite all that I would not be surprised to see a 10% correction sometime this year or early next year especially if the Fed actually raises interest rates (I don't think they will). I do not expect a correction to happen or feel that we are "due" - my reasoning on the correction is the massive volatility in currencies from the dollar strength, global growth/inflation slowing and the Fed tightening monetary policy. These are all practical reasons but either way I wouldn't be surprised.

    The moral of the story is the 10% correction call seems to happen every few weeks and has almost nothing to back it up. The talking heads on TV (I believe) are simply making stuff up or trying to get on TV by making these calls. There is not much (if any) real substantive reasons for these calls being made. The true facts about 10% corrections are:

    1) They rarely happen - 1 every 44 months.

    2) They always have a tremor draw first of 6%+

    3) We have already had two 10% corrections in this bull market, which means statistically speaking we have already hit our correction limits

    So there you have it, the myth of the 10% correction. Please post below if you have found any of this information put out by any of the major business news outlets.

    Apr 08 1:03 PM | Link | 2 Comments
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