This is now a “Tale of Two Cities”

Thursday and Friday saw one of the largest collapses in the volatility products that have been made when the market was so overbought. Most professional volatility traders (and these guys are smart) began accumulating long volatility positions a few weeks ago in anticipation of a reversal in volatility. Volatility continued to decline and their game plan is often to add to positions expecting volatility to revert to its mean. This past week, especially the past two trading days saw them capitulate and incurring large loses.

This is now a “Tale of Two Cities”. Over the weekend the New York Times published two conflicting articles. One was a factual article showing that individual cash levels are very high (they are not in stocks) and that number has been rising (they have too much fear of the markets). The second was more anecdotal stating investors were piling into equities in reckless abandonment (obviously one of the stories has it wrong).

The reality is that the VIX is now in the 10’s, high yield bonds are offering yields too close to treasuries and the Fed is concerned about too much complacency. But on the other hand the public really is not rushing into this market and when they are entering, they are buying higher quality companies, not speculative small companies.

A pause/pullback is due here but as I’ve been writing since last year, the path of resistance remains higher. Picking index tops is never a winning game. We stay with the trend, trade the pullbacks and let the markets go where they go. This one has gone up and has continued to reward traders and investors who have been positioned this way.

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