Quick rally, then volatility may return

May 25, 20125 Comments

Don Vialoux, creator of the popular technical analysis website www.dvtechtalk.com recently quoted Brooke Thackray’s Investors Guide. “According to Thackray’s 2012 Investor’s Guide, North American equity markets have a history of moving higher from two market days before the Memorial Day holiday until five market days into June. Average gain per period during the past 40 periods for the S&P 500 Index is 1.1%. The trade has been profitable 66% of the time. Canadian investors receive an extra bonus. The TSX Composite has a history of moving higher on Memorial Day when U.S. equity markets are closed.”

Don & Brooke’s observation of seasonal strength occurring into the first week or so of June coincides nicely with various oversold stock market conditions I noted on my last blog. My upside target for a bounce would be to former support levels on the S&P 500 of around 1350. That’s not a huge upside from here, and given my bigger-picture prognosis of weakness surrounding the end of Operation Twist.  I’m looking at any near termed bounce as an opportunity to become more defensive. I would expect that the VIX will pull back as a rally ensues, and I do plan on re-entering the trade (I bought and sold a VIX ETF recently, as discussed on last week’s blog). Look for a potential pullback on the VIX over the coming week or two coinciding with a mild stock market rally. The closer that the VIX gets to its breakout point of 20, the more attractive an entry point becomes. Other defensive moves include raising more cash, buying inverse ETF’s and focusing on defensive stock sectors with positive seasonal cycles (utilities, consumer staples, low beta stocks).


  • Why did the Vix go down today, even though the markets were down? Thx Keith.

  • A very sane and cogent scenario you’ve spelled out here. Not radical at all in either direction. I’m expecting a bounce as well, albeit slightly higher, and then a decline through SPX 1275 or worse. Playing both directions with options on the DIA

    • Thanks for the comment Vinnie
      Markets like this can present opportunities if you play it right.

  • Hi Keith. Just wondering why the Vix moved down today with a move down in the markets? Thx.

    • Marek
      The VIX is not specifically an inverse security to the market, although it often works that way. It is actually a reading of “implied volatility” for 30 days forward–thus, if options traders are paying premiums that imply a slight drop in volatility, the VIX will drop. My guess is that traders (as do I) expect the markets to settle a bit over the coming week or so, which lowers the VIX reading.
      Actually, I am counting on a drop in the VIX to the neckline area as mentioned in the blog–I plan on entering the trade again as close to the neckline as I can!


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