Volatility Trading & Stock Market Trends

Volatility Trading: Embrace Sharp Pullbacks

Updated March 2022

Volatility Index readings have surged to a new high (as shown in the header image above), meaning extreme behaviour in all areas can be expected in and out of the markets. Additionally, we added new psychological data points to the V-Indicator, and we suspect this new high could correspond to a new development in the Coronavirus outbreak. Let’s hope it’s a positive one.

The ETF Trend Portfolio is our most conservative portfolio, so in light of recent developments, one of which is that V-readings have soared to new highs, we are going to err on the side of caution. This is a dangerous development as, over the past 12 months, we added a new psychological component to this indicator, and this new high corresponds to the Coronavirus outbreak.

We are not in the “panic” generating business, so there is no need to panic, but this development could mean (operative word being “could”) that China is not telling the whole story. The dangerous development is regarding extreme market volatility; the market could shed several thousand points and recoup these losses quickly. Most traders are not prepared for this type of action, so when the market pullback strongly or appears to be crashing, they will throw the baby out with the bathwater and, in doing so, make a colossal mistake.

China Could be downplaying the situation.

In all likelihood, China is releasing particular pieces of data, but in general, the world is used to this. However, what could trigger a sharp market reaction if this data proves damaging? There have been previous scares; in each case, the markets sold off, but the sell-off proved to be a buying opportunity. The last sell-off was due to the Ebola virus scare in October 2018.

In the long run, this is not a negative development as the long-term trend is still bullish, so if it comes to pass, we will have an opportunity to get into stocks and ETFs at a discount. We have adjusted pending sell orders and stops and, in some cases, cancelled pending orders on the following ETFs. The bottom line is that while prudence is warranted, Panic is not; hence focus on the trend and ignore the noise.

Volatility Trading Tip 2: Don’t follow the Herd

Hence the statement below refers to several dangerous trends but not the ones that come straight to one’s mind:

This is a dangerous development as over the past 12 months, we added a new psychological component to this indicator, and this new high corresponds to the Coronavirus outbreak. Interim Market Update Jan 31, 2020

We want to clarify what we mean by dangerous (in the above statement), as we don’t want anyone to falsely assume that we are embracing some of the wild conspiracy theories regarding this virus. We analysed the data thoroughly, especially the psychological data.

We also looked at data evaluated by other level-headed experts; many thanks to our subscribers for providing links to some of these experts, which once again solidifies our claim that we are fortunate enough to have some of the best minds out there as part of our community. We have concluded that the Coronavirus issue is being blown out of proportion.

Weaponised news; A dangerous trend with no end in sight.

The first trend is that news will be weaponised to the extreme to support whatever narrative a group of individuals have decided to embrace or force on a subset of the crowd. Secondly, as V-readings have not surged to new highs, the market will experience more random bouts of extreme volatility, and this should be embraced when the trend is positive.

Thirdly, violence (as in wars, crime, etc.) and wild weather patterns will be more prevalent from now on and extreme, and we mean foolish behaviour will be embraced. Lastly, polarisation levels will rise so extreme that we could reach a point where a simple disagreement sets off something akin to a mini-civil war.

Back to the Coronavirus issue:

In Asia, masks are selling out like hotcakes, and we suspect many stocks in the vaccine creation field have experienced substantial price increases. In other words, companies are making out like bandits while the masses are being fleeced again. The data states that this virus has a mortality rate of 3%, and no new data has refuted it.

Therefore we find it quite interesting that many financial experts with no background in medicine or psychology have gone out of their way to state that the situation is on the verge of becoming a pandemic. Too many experts believe in the deep state; while there is an apparatus that could be called the “deep state”, their understanding of this topic is limited at best.

These power brokers work on brainwashing people so the players are willing participants or blind participants (blind as in being mentally blind and not physically blind), which boil down to the same thing. These individuals are used as cannon fodder; the objective is achieved by pandering to their wild fantasies. This objective is achieved by allowing Gossip artists to masquerade as reporters. In the old days, they would be called fisherwomen.

We have found no objective data that backs the many claims non-experts are pushing regarding the Coronavirus; the only dangerous trends we see are the ones we have addressed above. Could the situation change? Yes, anything is possible, but history reveals that most naysayers are full of hot air as the world was supposed to have officially ended a long time ago.

High Volatility Index Readings: Use This To Your Advantage

There have been more than a dozen outbreaks since 1980 and with far deadlier outcomes in some instances, but if you look at the chart above, after a knee-jerk reaction, the markets trended higher. Hence, the Tactical Investor says; “every disaster leads to a hidden opportunity”, and the only way to spot that opportunity is not to give in to panic. We envision a similar outcome for the coronavirus, the markets could still sell-off, but that sell-off should be viewed through a bullish lens.

The mass mindset is hard-wired to panic. One can overcome this shortfall by observing this behaviour impartially and then asking, “why am I doing something that has never led to a positive outcome”. Secondly, as we have advocated for years, one should maintain a trading journal, and the best time to put pen to paper or fingers on a keyboard is when the markets are tanking.

Make a note of the emotions that are swirling through your mind. Jot down some of the headlines the media is pushing out and observe the reactions from your fellow man. This information will prove priceless in the coming weeks, months, years and decades.

The markets are trading in the extremely overbought ranges on the weekly charts, and in theory, they should let out some steam, but the monthly charts, for now, are exerting more upward pressure than they usually do. It should be noted that the weekly charts also move relatively slowly, so there is still time for the markets to let out some steam.