Blaring The Bear Market Siren

The US stock market wobbled and wavered on Wednesday, ultimately fizzling out as the day's recovery hopes melted away like a popsicle in the summer sun. Nvidia and other tech behemoths kicked off the day with gusto but quickly lost steam, as if deciding to take an unexpected afternoon snooze. This lethargy led to a broader market slump. Nvidia itself slid down by 3.5%, while not-so Super Micro Computer experienced a steep fall, plummeting over 20% following a disappointing reveal of their fiscal fourth-quarter earnings. The once meteoric rise of AI stocks has left investors spellbound, questioning whether this surge is merely a dazzling but ephemeral spectacle in the financial firmament.

Meanwhile, our ever-vigilant VIX, the maestro of market trepidation, continues to wave its "proceed with caution" banner, prompting Wall Street to focus more on unpacking risks rather than gearing up for a bullish journey. U.S. stocks trudged through the afternoon like an old car sputtering and coughing, and finnaly conking out. With Market-on-Close orders blaring the bear market siren, it's shaping up to be a rather awkward baton pass to Asia.

Although the VIX dipped to 22 earlier on Wednesday, it eventually settled around 28. And that spells out a familiar market mantra: when the VIX heats up, stocks tend to cool down. The nature of the beast itself suggest the +25 VIX serves as a harbinger of more chaos in the market's grand theater than tranquility on Wall Street.

Thankfully, there's a consensus that most speculative shorts and carry trades involving the Japanese yen, which were at the heart of recent market turmoil, have been substantially reduced. This has led to a slight decrease in implied yen volatility as of Wednesday, though it remains elevated throughout the curve. So, let's not break out the champagne just yet; plenty of uncertainties are still hiding in the shadows.

Despite a dusting of dovish reassurances from the Bank of Japan aimed at calming the markets, the idea of quickly returning to a state of low macroeconomic and FX volatility might be overly hopeful. It's probably as likely as spotting a unicorn lounging at a Wall Street trading desk. Indeed, the afternoon dip in U.S. markets served as a stark reminder that the trading environment remains as daunting and unpredictable as ever.

Why the concern? The potential for a broader U.S. economic slowdown, misaligned global monetary policies, and the bubbling geopolitical tensions in the Middle East cast long, ominous shadows across financial markets. Furthermore, the U.S. political election looms, potentially turning the markets into more of a chaotic mosh pit than a graceful waltz.

Here’s a deeper look: The specter of a U.S. economic downturn hangs heavily, stirring unease throughout the financial world. Simultaneously, central banks globally are out of sync, playing their own tunes and creating dissonance rather than harmony. In the Middle East, the situation is a tinderbox, with tensions a mere spark away from escalating into full-blown conflicts that could send oil prices—and consequently, global inflation—skyrocketing. These elements converge to craft a market climate rife with volatility and unpredictability.

Though Tuesday offered a brief interlude of calm, it’s prudent to remain vigilant. The market may long for a peaceful passage, but we're gearing up for what looks to be more akin to a rollercoaster expedition. As I cautioned my traders today, thankfully, this week features a light U.S. economic calendar, a small mercy given that a barrage of bleak economic data is the last thing needed in such a tense atmosphere.

Prepare for a potentially "Turbulent Thursday" and brace for what might end up as a "Frantic Friday."

FAST MARKET TRADING TIP #1

Modern warfare is often described as long stretches of monotony interrupted by moments of intense fear. In trading, a similar pattern emerges—it's mostly uneventful, with occasional bursts of heart-pounding action. The markets are usually tranquil, but what truly counts is your response when everything hits the fan.

In crisis markets, traditional concepts like 'overbought' and 'oversold' lose their usual significance. It's critical not to be the person who bets against the market's direction throughout an entire bear market. In times of crisis, stocks can remain oversold for prolonged periods, only to swing to extreme overbought conditions shortly after. It’s essential to distinguish between typical sentiment-driven risk aversion and the deeper, more sustained risk aversion seen in crises.

For most market downturns, trading based on sentiment indicators and overbought/oversold signals can be effective. Traditional tools like put/call ratios, the Greed & Fear Index, or DSI often provide reliable cues for reversals, signaling opportune moments to act. However, in a genuine economic or financial crisis, these indicators may become unreliable.

For instance, many short term quants code a very straightforward metric known as The Deviation to gauge overbought and oversold conditions. This method calculates the difference between the current price of an asset and its 100-hour moving average. When the deviation reaches levels previously seen at extremes, it typically suggests a potential for mean reversion. Yet, remember, in true crisis conditions, even this signal might not hold the usual predictive power.

People often think trading mathematics is complicated, and while Quants might sometimes sound like Charlie Brown's teacher, the reality is that building your correlation and indicator codes is akin to basic paint-by-number. The number-crunching quants and coders can just program faster.