After everything that’s been published elsewhere about today’s plunge, there isn’t much I can add in the way of analysis—so I’ll just briefly summarize the technical picture. The S&P 500 Index is short-term oversold and looking primed for a bounce following this afternoon’s final-half-hour recovery,…
…while intermediate-term momentum is rolling over into a new sell signal,…
…and the VIX is back at the high end of its August-September range.
If we were already committed to a position that required hedging, a new trade probably would be warranted at this point. But since we’ve prudently stayed on the sidelines—and still have four full weeks remaining until October expiration—my inclination is to see how fears of another credit/economic crisis evolve over the weekend.
To be more specific, we’re looking for three conditions:
- More “normal” daily moves in SPX/SPY, which in the current context means closer to 1% than to 3%;
- Enough of a drop in implied volatility to put it back in the lower half of its recent range;
- Improving market sentiment—i.e., a lower VIX, declining put/call ratio and less bearish market breadth.
If there’s any good news out of Europe this weekend and next week’s economic numbers (new home sales on Monday, the Case-Schiller Index and consumer confidence Tuesday morning) aren’t too bad, we’ll see what kind of risk profile we can get with another wide double-diagonal like the one we centered our portfolio around last cycle. A repeat of last month’s 5-1/2 percent Model Portfolio return—over a period of just 3-1/3 weeks, with a large position in cash for most of that time—would be just great for a market environment in which uncertainty and risk continue to run high.