Correlation 1.0 Market

Another 6.5% loss for $SPY, following 7% drop last week and 4% decline the previous week. The charts of the three biggest banks in U.S. – $BAC, $JPM, $WFC look like the Niagara Falls. The $VIX is up 150% for the past three weeks. If this is not panic selling and forced liquidation, I don’t know what it is. As a reference point, take a look at the performance of some of the worst periods for the stock market over the past 15 years.

We are overdue for a bounce technically, but it could easily get worse before it gets any better. The market needs a catalyst to rip higher. It could be news for another edition of quantitative easing. There is nothing else left actually, for both Europe and U.S.

They say that liquidity trumps fundamentals. It is true. The problem is that mood trumps liquidity and currently the mood is dark, for various reasons. During periods of forced liquidations, no price is too low, no stock is too cheap, at least from my perspective.

Value investors live for selloffs like these and if they have any capital left after trying to short the momentum rockets over the past 2 years, they must be stalking for new buys. Valuation is not a catalyst for me, so I stay on the sidelines. Most I’ve done over the past 2 weeks, has been intraday and overall I haven’t managed to appreciate my capital. Probably because I was foolish enough to go against the trend and buy as I should have been sitting on the sidelines or shorting. Sometimes is hard to follow your own advice. I rarely make money being short, so I rather not to.

What is the game plan for the rest of the week? We are still in a correlation 1.0 market, meaning that if the market continues to fall, most stocks are likely tumble and if it bounces, most will follow to the upside; therefore I will focus my attention to two trading vehicles: $SSO and $VXX. If I do anything, I would risk 1/4 of my usual position as the current volatility has elevated significantly the daily range.

The main goal during bear markets is to survive and protect capital. There will be better times to be aggressive.

Biggest One-Day Decline Since the Flash Crash. What to Expect from Here

The $SPY is down 7% for the last 5 days. The fear is finally back in full force. It is worse than the Flash Crash of May 2010 as back then the drop and the recovery happened too fast for most people to react. The current market action can only be compared to the Fall of 2008. Back then, the only way to survive financially and mentally, was to go to bed with 100% cash every night and trade intra-day as it was not atypical for the market averages to move 5-6% in either direction in one session.

Today’s sell-off was caused by forced liquidation, meaning that institutions are selling not because they want to, but because they have to. Margin calls. The reason behind the decline does not make losses hurt less. A loss is a loss just like a profit is a profit, disregarding the underlying reason.

A few people on my stream asked me what to do here. I can’t tell you what to do, because I don’t know your financial situation. I can tell what I am doing.

It is too late to tell you that you have to sell when you can, not when you have to, because chances are that if you have to do the second, there won’t be enough liquidity to meet the supply. Even if you are a long-term investor, you need to use stops or at the very least stay out of margin, so you don’t become a forced seller. Forget what you know about the company and how bright its future is. Value is what you think you have. Price is what other people are willing to pay for it. If your positions are causing you stress, close them. Life is too short to cause yourself unnecessary headaches.

It was a correlation 1.0 day, during which individual catalysts did not matter and all stocks were hit. Some held better than others and are still trading above their 20-day MA. These are the stocks I am watching for a trade as they are likely to break out first when the market bounces. Some say that just because there are still people talking about a bounce, it won’t happen. Guess what? Today I saw more people panicking and waving the white flag than anything else. The market has never moved in a straight line for a prolonged period of time. Even in the Fall of 2008.

I expect a sizable bounce within the next 5-10 days, which will be shorted as the technical picture is already broken and it will take long time before it heals. My expectations are not based on wishful thinking. They are based on knowing market history and having experience. With that in mind, I realize that trading is a game of probabilities, meaning that anything is possible and no scenario should be excluded. This is why I close all initiated positions at the end of the day. There is no other way I can control risk at this point. My main goal is to preserve capital, so I can take advantage of the intra-day volatility. Live to trade another day.

12 Stocks on the All-Time High List

While the $QQQ is struggling to hold above its 200-day moving average and the $SPY has just discontinued its series of 7 consecutive negative days, there are stocks that are trading at new all-time highs. What could be a better indicator of strong underlying demand than a new all-time high on the background of massive sell off.

Let’s take a look at the themes on the list:

Coffee: $GMCR and $PEET

Gold: $RGLD

Agricultural chemicals: $TNH

Investment brokerage: $MKTX

Waste Management: $CLH

Diversified Machinery: $TWIN

Restaurant: $ARCO (the so called McDonald’s of South America)

Global Payment Processing: $MA

Information and delivery svs: $GNET

Online auction for surplus and salvage assets: $LQDT

Electric Utilities: $BIP