How ever it turns out, one thing is for sure we are in a major market move. The volatility is old school. The whiplash on the dow is the kind you only get in a bubble or a crash.
The long era of curate markets smoothed QE are gone.
So calling what happens in the near now has big bucks for the correct call and fat loses in short order for the wrong one.
The plunge team, real or imaginary is at work right now. A bottom of sorts is in. The initial freefall is over for now.
In the recent past this point, a big correction, has reversed spectacularly in an almost automagical fashion. Its as if a correction is allowed but not a crash. It could be politics, it could be economic intervention or it could be the beloved random walk. Whatever it is, here we are again.
Can that pattern keep on happening?
If it can’t then at some point this kind of correction is going to turn into a crash.
It could be now.
So what would the chart of the Dow in 2016 look like if only we could step to January 2017. Perhaps the charts can help.
I like charts because they can predict the past exactly. This can be more useful than you might imagine.
A long sequence of sharp correction followed by snap back rallies has happened before. Between May 1999 and 2002 the Dow plateaued. This could be the pattern we are in. The market did crash in the end and while the old fashioned stocks held the line, the Dotcom crash saw the Nasdaq tank horribly.
Sound familiar? As Oil and commodities implode could the broad market stay on a plateau, spitting intermittent corrections out?
(1999-2002 chart)
Then again that might be wishful thinking. With the end of QE, China slumping and the world economy on the edge of recession are we about to do a replay of a 2007-2008 replay. Should this not be the beginning of the end of the lovely rally that kicked off at the end of the credit crunch crisis. Stock are high and the environment of QE is going into reverse. A p/e shift of a few point down to compensate would mean a crash in stock prices as earning growth falters.
A crash would take the Dow down to 14000.
(forbes 2007 crash)
It wouldn’t be as bad as 2008 because the whole financial system won’t be on the edge of collapse, but the pattern would repeat if not the scale.
In summary we are left to decide between these two pattens. The buy the dip, correct and rally market of 1999 to 2002 and the risk off, capital preservation, buy the crash aftermath.
I am prepared for the crash option, but only a fool believes he is going to be right all the time.
As such, half of my portfolio is effectively buying dips and half is waiting to buy an aftermath.
Its an unsatisfactory situation, but how could it be otherwise.
When the global markets are reliant on the monetization or otherwise of US QE, European QE, Chinese government intervention and Japanese currency and QE conniptions, there are no pure plays to rely on.
The only thing that will be reliable is wild volatility.
Should we trade the VIX?
No thanks, I’ll sit on cash and wait.