Special Risk Capital Management LLC

Market Volatility: A Day Trader’s Dream July 16, 2022

July 15, 2022 – This market decline has turned into a day trader’s dream, they thrive on volatility in both directions.  Witness what we saw on Wednesday morning (below, a 4 day 30 minute bar chart).

From the market open on Tuesday down to the low on Wednesday, back up to the close on Friday was a “round trip” of over 30 points on the SPY (S&P 500 ETF).  That move (if perfectly timed) would be worth $15,000 with one e-mini futures contract and $75,000 on a full sized futures contract.  Now I’m definitely NOT an advocate for day trading, but my purpose is to bring forward just how volatile this market can be, especially around major economic announcements.  For position traders and investors, volatility signals caution.  When moves quickly appear in the market, they can easily disappear, and quickly too.  My last point is that these types of moves feed on themselves.  i.e “Buying begets buying, & selling begets selling.”  The futures and options markets do move the stock markets as the writers of these contracts react to lower their risk by buying/selling the underlining stocks.  There is a lot of portfolio hedging using leverage contracts out there right now.  Hence, volatility as people scramble to adjust exposure on the fly.  We’ll see more of that as “the big guys & gals” cover their short positions (hedges) driving the markets up . . . for awhile . . .  then . . .   Our task is to evaluate and respond to investment trends, not short term volatility.  I’ll feel a lot better when I see the amount of Put contracts decrease.

One other point to bring up is the 30 year Treasury Bond auction this week.  With the FED raising interest rates one would think that the prices would be going down (interest rates rising), but . . .  that did not happen.  The auction was quite successful.  There was demand for the US bonds and prices went up (buyers willing to accept a low interest rate).  Why would anyone want to tie up money for 30 years at this low interest rate?  Two ideas:

1. Investors assume that the FED has reached a near term peak of increasing rates.
2. Major concern about the world economies; a flight to safety.

As the old saying goes, in times of economic stress, “investors are more concerned about the return of their money more than the return on their money”.  The rise of the US dollar compared to the world currencies does not help these concerns either.  It makes US exports more expensive, thus a strain on the US economy.  And it really throws a “monkey wrench” into the world markets.  The US$ is now worth more that the European Euro and that’s very unusual indeed; not a stabilizing factor.

These are interesting times.  There are some signs of a market trying to at least find a base.  The question is: is this a sign of the re-accumulation of shares or just a pause below another down leg.  Watch the volume on up bars (& down) for clues, especially on market stalwarts.  Are investors buying or selling?

The Short Term Sector Strength table is shown below-

Have a good week, but be careful out there.   …………  Tom  …………….

Price chart by MetaStock; pie chart & table by http://www.HighGrowthStock.com. Used with permission.