I spoke to the best traders I know in the market Thursday night, and to a man they said the market looked terrible. Although prices were high, the momentum was totally gone and volume was shrinking.
Worse, these conditions prevail as we head into May, the onset of the traditional “RISK OFF” season (click here for “The Hard Numbers Behind Selling in May”).
Best case, it continues to grind sideways in a narrow range. Worst case, our long awaited 10% correction is finally here.
The big “tell” would be how stocks responded to the Friday nonfarm payroll. If it turned into a “buy the rumor, sell the news,” or made a marginal new high and then sells off hard, then it would herald the onset of a new correction.
That was exactly what we got.
You knew immediately that things were heading south, even though the Dow opened up $44. The big momentum like Tesla (TSLA), Facebook (FB), Netflix (NFLX), and Amazon (AMZN) rolled over like the Bismarck right out of the gate. Bonds (TLT) also took off like a bat out of hell, not exactly what you want to see when you own stocks.
I spent Thursday night writing up Trade Alerts to sell short the (IWM), the (SPY), and the (QQQ). You only had about 30 minutes when the market waffled indecisively to get these off. As it turned out, I could only get the first two done before the market fell away like a house of cards.
I have already received ecstatic emails from nimble traders who got into the (IWM) August, 2014 $113 puts as low as $3.65 and then saw them soar to $5.25, an instant profit of 44%. This also boosts my year to date performance back to double digits, a welcome development
I have a number of cross hedges going on now in my model portfolio which I should explain, just to show you there is a method to my Madness. The May (SPY) $193-$196 put spread is a short volatility trade that balances out the long volatility and time decay in the (IWM) August $113 puts.
I am long the higher beta (IWM) puts and short the lower beta (SPY) puts. The 35% “RISK OFF” position I have in the (SPY), (IWM), and the (VXX) will also offset lost profits in my one 10% “RISK ON” position in the Japanese yen (FXY) put spread. This balancing of multiple risks is what a real live hedge fund trading book looks like.
Fasten your seat belts. This could be the big one.
