Volatility (Vix Index) at an Inflection Point

Volatility (Vix Index) at an Inflection Point
John Netto – Chief Investment Strategist – NetBlack Capital –
       Monday, December 08, 6:46 PM PT – In my preview for the week, I
wanted to focus on four vehicles that would help determine overall
market sentiment and how I would be proceeding with my trading
strategy based on those dynamics. The four were gold, 30 year
bonds/NOB Spread, USDJPY, and the relationship between the large cap
and small cap indexes (S & P 500 futures vs. Mini Russell Futures).
While we noted the underpinnings for a rally were in place this week,
there were some indications the gains put on by the market today are
tenuous at best. The first being a robust move in treasuries following
early morning weakness served as the first indicator this rally was
more a dynamic of technical buying than any meaningful asset
allocation shift into equities.
Despite the promising start with risk aversion abating, the USDJPY
came under pressure late in the day in lockstep with the pullback in
the equity markets as overnight highs near 9385 were never
meaningfully challenged again during the US Equity day session.
Leading me to confidently speculate an overhang of supply is ready,
willing, and able to offer into these rallies and start choking the
bids again, thereby sending this cross lower.
Gold was another market that "should" be feeling the benefits of all
of this monetary expansion, however it failed to gain materially on
its early morning gains and its attempts at highs near 783 fell short
at the 15 day moving average and make it vulnerable to possibly retest
750 tomorrow. I used the rally to go to delta neutral instead of
waiting for the metal to hit 795-800ish. This is material b/c I
thought it had the potential for such a move, but now think the chance
for a downside move has me taking a more nimble posture with the long
gamma exposure than inevitably arose from my long straddle coming into
the Monday session.
The one bright spot we pointed out last night is that the small caps
did gain materially on their large cap brethren, which can at least
serves as some positive note going forward.
With all of the aforementioned markets, the volatility permeating
through every financial vehicle over the last 3 months appears to have
subsided over the last few weeks since  the beginning of the holiday
season. Today's VIX reading took us to a low of 57.35 and matched up
nicely with the longer term upward trend line on the daily chart. As a
trader and educator, I teach people to take on positions at spots of
value, as you want to get into trades that clearly define your
risk-reward ratio. The above dynamics make the market vulnerable to an
early morning sell off and I will be looking to get short early on and
assess things from there to see if they are worth pressing. Those who
are logged into SniperScope, (my web chat room where I show all of my
orders, working positions, and open P and L,) will get a real time
glimpse of this. To learn more go to www.osoktrading.com or email
info@osoktrading.com