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 aim to provide further clarity regarding the term “dangerous” mentioned earlier, in order to prevent any potential misinterpretation that may arise, leading to the assumption that we endorse unfounded conspiracy theories concerning this virus. Our analysis extensively examines the available data, with particular emphasis on the psychological aspects.

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.

Challenging Deep State Beliefs and Questioning Coronavirus Claims

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.

FAQ

Q: What is the significance of the surge in Volatility Index readings?
A: The surge in Volatility Index readings indicates that extreme behaviour can be expected both within and outside the markets. It serves as a warning sign of heightened volatility and unpredictability.

Q: How does the new psychological component added to the V-Indicator relate to the Coronavirus outbreak?
A: The addition of a new psychological component to the V-Indicator, along with the surge in its readings, suggests a potential correlation with the development of the Coronavirus outbreak. This implies that the market’s reaction to the outbreak could be influenced by psychological factors.

Q: Is there a reason to believe China is not providing the complete picture of the situation?
A: While there is no concrete evidence, the possibility of China downplaying the situation cannot be ruled out. In the past, similar instances have occurred where specific data released by China did not accurately reflect the severity of a situation, leading to market sell-offs.

Q: How should investors approach the current market situation?
A: Prudence and caution are warranted in light of recent developments. While panic is unnecessary, it is essential to focus on the long-term trend and not be swayed by market noise. The current market volatility may allow investors to enter stocks and ETFs at discounted prices.

Q: What dangerous trends are highlighted apart from the Coronavirus outbreak?

A: Several dangerous trends are identified, including the weaponization of news to support specific narratives, increased bouts of extreme market volatility, a rise in violence and extreme behaviour, and heightened levels of polarization. These trends may have significant implications on various aspects of society.

Q: Are claims about the Coronavirus situation being blown out of proportion?
A: According to the analysis conducted by experts, including psychological and objective data, the claims about the severity of the Coronavirus situation are deemed to be exaggerated. While the status could change, historical evidence suggests that most doomsday predictions are often unfounded.

Q: How can high Volatility Index readings be advantageous?
A: Despite initial knee-jerk reactions, historical data reveals that market trends tend to recover and increase after outbreaks and disasters. This indicates hidden opportunities that can be spotted by maintaining a bullish perspective and not succumbing to panic. Panic-driven behaviour rarely leads to positive outcomes.

Q: How can investors overcome the instinct to panic?
A: Overcoming the instinct to panic involves observing the panic-driven behaviour of the masses impartially and questioning its effectiveness. Maintaining a trading journal, especially during market downturns, can provide valuable insights into emotions, media headlines, and reactions, enabling a more rational approach to investing.

Q: What are the current technical indicators suggesting for the markets?
A: The weekly charts indicate that the markets are trading in highly overbought ranges, suggesting a potential need for a correction. However, the monthly charts exert more upward pressure than usual, indicating that the markets can still continue their upward trend before experiencing a corrective phase.

Originally published Feb 29, 2020