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Mental Preparation for 2015

Daily Rap 11-25-2014

As has been the case, the market was open and therefore higher nearly all day (albeit not by all that much) before closing flattish.

Away from stocks, green paper was weaker, fixed income was slightly higher, oil lost 1%, and the metals were higher, with gold gaining fractionally and silver adding 1%.

And You Thought Crazy Eddie's Prices Were Insane I really wish there was more to say than what I have been able to offer, but unfortunately there is not. We have the makings of a giant train wreck in the stock and bond markets, give how maniacally both are priced, and the insane leverage being utilized in both. But the lunacy doesn't matter, nor do the problems, until they do, and then they virtually ensure that there will be a very large wipeout....more

Last year's posts for Ask Fleck

Q: I'm curious how you feel about the semiconductor stocks, INTC and MU specifically. They seem quite frothy to me.

Fleck: They will be very fat targets IMO, but given the market's mood/momentum, etc., you can't get involved being short or buying puts until you have a catalyst.
(posted: 11/24/2014)

Q: I thought you'd like this
November 2014 - Punk Economics Video

Fleck: Absolutely brilliant!
(posted: 11/24/2014)

Q: We discussed volatility as a "play" on the overall equity market, with an emphasis on a high degree of caution when trying to "play" the thing. As a general rule, "volatility", as measured by the behavior of long/short derivatives, is reported as a single number. When long side confidence is high "volatility" (shown as VIX or $VIX depending on the charting service) declines as fewer "players" seek put derivatives as "protection" against the downside. The result is a single number that approaches "10" as a logical limit to complacency. When the "pooh pooh hits the fan", as in 2008, the VIXENS can shoot up quickly as high as "80" or so - reflecting a full force panic. Routine sell offs of 10% to 20% will usually send the VIX into the 40s. Recently, VIX dipped briefly below 11, reflecting almost religious conviction that the Fed would never allow the market to decline. That represented, in my opinion, the ultimate bullish conviction (as expressed by the behavior of VIX). I suspect that any flirtation with a VIX number of, say 11 to 12, might be a great short sale opportunity in the indices. Timing, of course, is everything but once bullish complacency reaches such an extreme, the subsequent line of least resistance is down. When that happens, VIX will have a nice run to the upside. Conversely, when VIX screams up towards 40 to 50, a long side trade might be possible.
The simplest way to "play" the volatility would be VXX if you expect the volatility to increase. A VXX "bet" anticipates a market decline - the sharper the better. The XIV "bet" would be made at a panic bottom or a decent "oversold" point whereby volatility would be expected to decline on the rally. I have nibbled the VXX from time to time when looking for at least a correction from "overbought". Best time to place the bet is when just DJIA and/or SPX is grinding a "new high" (lots of typical hype) while internals are getting very sloppy within an "overbought" market. These conditions usually set up a decent drop (say, 5% or more) in the big indices, sufficient to send the VXX up from, say 12-13 to somewhere north of 30. It can be a decent day's work. I think the VXX floor is around 12 or so, reflecting about as much complacency and bullishness as is possible. The current bull market has lasted long enough to generate a record amount of bullish conviction - hence, no need to buy downside "protection". The thing that makes VXX really hop is when the herd suddenly decides to buy protection through put derivatives. The earliest, most primitive version of the volatility indices used simple calculations of puts and calls relationships. Modern versions encompass a broader array of "upside/downside" activity (volume, breadth, etc. among derivatives.) Hope this helps.

Fleck: I get questions regularly about the VIX. It is a very tricky instrument to use properly, but I thought readers would benefit from Mr. Skin's recent "thoughts" on the subject. I would advise people to be very, very careful if they try to use VIX-oriented products.
(posted: 11/24/2014)

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