Often the markets will exert the most pain to the majority of the group of traders and it is based on the premises that the crowded trade is usually the hardest to get out of and hence get squeeze into a bad position that will have them take losses.
VIX inverted but Not Necessarily a Bad Thing
On Friday the markets were in a swift down move and continue going lower after hours. The downward momentum was clear and likely an issue moving forward for at least the next three weeks. Why?
The VIX curve is currently inverted meaning it is in backwardation. The front months having higher volatility than the further out months. This means traders are fearing bigger moves this coming few weeks than 3 month or even 6 months from now.
Yet the selling that occurred last week had barely drop in price for the indexes. In addition the front image of this post is showing that a significant amount of traders have sold their longs and reducing their short positions. This would mean the the underlying strength in the market is positive since there is more free cash ready to get back into the already highly leveled markets.
VIX may have Peaked Which Equates to Fear in Markets also May have Peaked
In addition the VIX may have peaked last week since each time in the past two years when VIX exceeded 40 there was only one time where markets continue to fall on peak VIX. That one time was in late 2018 and can be mentioned due to FED tightening the markets were to fall. All other instances markets rose after the VIX peaked. We are in the mist of a VIX peak as of last week. Still not know if we indeed hit a bottom but chances for further spike in VIX is not as much as a drop.
I like to conclude that although I show data points that appears to support a bullish case remember traders can also post negative points to support a bearish case. The reality is the edge on the trade is so minimal that it is very often difficult to find which has the better edge and hence the right trade to make. The point I am trying to make is although markets may have sold off last week it will not be easy to determine if it has more drop to come or it ended on Friday. 2020 brought in a lot of different trading action and so will 2021. Do not think just because prices appear to be dropping does it mean for certain that the markets will go down.
None of what I write is financial advice. It is for entertainment purposes only. Thanks for reading!
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