Market Outlook 10-Jun-2023
Volatility Era Update, RUT vs. NDX, Gold Seasonality Played Out
Good afternoon investors and traders,
There’s a few topics I want to cover in today’s outlook:
Volatility Era Update
The historical RUT vs. NDX chart (monthly scale)
Gold seasonality and the recently closed GLD options position (+44%)
Volatility Eras
Here’s the original post where I discussed volatility eras:
About a year and a half ago, I dissected the patterns of market volatility, identifying distinct periods of high and low fluctuations. I revisited critical periods like the tech-fueled era from the late 90s to the early 2000s, as well as the tumultuous stretch from 2007-2012, which began with the housing market crash and ended with the "Great Recession."
Additionally, I recognized periods of calm, such as the notably prolonged phase of low volatility from 2012-2020.
Looking back on the equity market's course, I noted one of the most rewarding ten-year stretches. Simultaneously, during generational market runs, I observed that when these runs significantly stretched from the 10-year Simple Moving Average (SMA), they often displayed signs of slowing down or stopping-action.
Fast forward to today, the perma-bears who had been erroneously predicting a market crash since 2011 finally saw their predictions materialize in 2022 (not really the best track record for them), as I had also anticipated a market pullback. However, they were unprepared for the market's rebound and the establishment of a new bottom in October 2022.
Back in January 2022, I recommended caution and emphasized diligent chart analysis and sensible trading, rather than blindly following bullish sentiments. This advice is as vital today as it was then. I will persist in closely scrutinizing the charts, learning from market trends, and aiming to step back before any major downturns occur.
Let's keep trading wisely and responsibly.
As regular readers know, we've been on an upward trend, which comes as no surprise. Since September, I've been preparing you all for a transition from the bearish atmosphere of 2022 to a potentially bullish phase. Let's revisit my thoughts from September 2022, shortly before the market pivot:
My takeaway:
I want to be prepared for the pending six-month stretch of bullish seasonality. I know the flip from bearish to bullish winds is not guaranteed. But I also understand that the market has incredible methods and capabilities of luring in and trapping enough people at the most unfortunate time. Perhaps the next two weeks will do the trick.
During that time, the market sentiment was quite bleak, catching many off-guard and setting the stage for a sustained rally - precisely what the market delivered.
However, I am now raising a short-term caution flag. Media outlets constantly highlight the ongoing low volatility while the Fear & Greed index consistently reports high values:
It's crucial to remember that nothing ascends in a straight line, and the market journey is invariably bumpy. Throughout the year, I've introduced several technical indicators suggesting the market will keep moving upwards (I'll provide an update on these next week). Still, there's always a need for a sentiment reset.
This isn't about stirring panic or promoting pessimism. Instead, it's about cautiously expecting pullbacks that might emerge between now and the end of the year. I continue to foresee the uptrend persisting, and currently, I see no reason to anticipate a dramatic downturn.
It appears that a mere 1-5% pullback is sufficient to reset market sentiments, and that's not a bad thing at all.
Zooming out, I hope to provide a longer-term picture in the section below.
RUT vs. NDX
The graph above provides a discernible range for the RUT vs. NDX. Tracing back to the NDX's peak during the dotcom era, we can observe a surge in demand on the RUT/NDX ratio chart around these current levels.
Please note: I'm not predicting another dotcom-like collapse for the NDX at this point.
The purpose of the aforementioned graph is to illustrate that, historically, small caps have experienced substantial demand in this area compared to tech.
Examining small caps exclusively, I've incorporated a Schiff-style pitchfork onto the monthly RUT chart shown below:
Using the 1990 lows in RUT (which was a test of the 1987 market crash lows), I’ve discovered that there is an excellent Schiff pitchfork fit
A key observation I’m making is that the momentum (via PPO) has held a consistent range, excluding the major GFC era
With the pitchfork 50% line holding on the recent RUT pullback, combined with the momentum nearing the bottom of the range AND the ratio vs. NDX nearing the bottom of its range, I suspect the opportunity is ripe for small caps to outperform. I also suspect the majority of market participants are not expecting this. The “breadth” that has been missing, might be right around the corner.
Gold Seasonality & GLD Options
Back in January, I alerted that there was a tactical play based upon a combination of the Gold chart and the seasonality. After studying both, I determined that there would likely be an amazing opportunity for a quick flip in gold related call options.
Here’s the timeline:
On January 8th, I first highlighted the opportunity via Gold stock AGI:
How I’d like to play AGI:
If the market gives the setup, I will take it. Here’s what I’ll be looking for as my ideal entry:
The seasonal pattern continues to develop per the pre-election year pattern shared above, with some more bullishness into February and a pullback into the current area in March.
I want the entry in March (pullback) as long as the AGI setup looks bullish.
At the time, Gold was trading at around $1,865 per ounce, having appreciated by 15% over approximately a 45-day period. The market was buzzing, premiums were high, and I was keen to ensure my entry was strategically timed, given the transient nature of options.
Hence, I mapped out a plan for the trade, predicated on the chart and seasonality patterns, and was on the lookout for a market pullback in March. As it happened, this was indeed the case, and following a couple of months of market volatility, I was able to acquire GLD options at a more attractive price of ~$1,830 per ounce on March 10, with significantly reduced premiums.
These GLD options would subsequently generate a swift 44% return over a ~2-month holding period, which is quite a commendable outcome. The key point here is that seasonality can play a critical role in market trading strategies. While this is just one example, there are countless other similar cases.
As a premium member, you'd be in the loop with regular updates on not only seasonal patterns but also Point and Figure objectives and various other critical market indicators that aid in effectively navigating the financial markets. Consider upgrading to a premium membership to avail yourself of these ongoing benefits.
Best Regards,
Trace