Even the best laid plans are redrawn

Low Vol / High Vol = the only game in town

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Yesterday I envisioned a trade plan to tackle the anticipated volatility spike off the monster retail sales report — a volatility spike that never transpired. It was more like a volatility thud. I can measure volatility threshold with the JATS PT indicator, and I was watching real time that the vol was not there. And I was immediately like, ok, wow, what just happened? And I knew at the instant the report hit the tape that we would see low vol drift higher, and so that is precisely what the market did — even almost getting up to my top level (Daily PT3 on ES) near the end of session.

So what has changed this time to cause monster economic news to fall flat with volatility? Well, that is why I am sitting here at 12:45 am writing this. Because I saw a tweet and it dawned on me that the institutions are firmly in control of the order flow and they are protecting their investments, e.g., themselves.

According to BoA, retail options investors peaked in Jan ‘21 from their 11x 2020 average, which is probably why we saw no volatility spike on yesterday’s retail sales drop. And this portends that we are in for a long haul of low vol drift flat and higher in the equity indexes until the fed’s next rate hike.

My assumption is based on the fed’s own recent “enhanced forward guidance” that it will follow the 2013-14 tapering playbook well before the hiking begins. The market continued rallying during this time frame when the fed was flattening liquidity from the market.

You can see the effect of the fed’s first tapering from 2014-2019. While the fed started removing some liquidity — the other central banks were still pumping the juice into their respective markets. So I am not sure what will happen when fed starts guiding us into tapering, whether we will see the Feb 2019 taper tantrum when Powell came into office. I hope he has learned from that last mistake and provides the market with ample notice this time beforehand.

So the short term axiom is don’t short the strength. That is some very wise advice I received not too long ago. And yet it is still something have struggled with, including I will have to admit, even yesterday when I tried shorting the market. It doesn’t work unless — the market falls below the Put Delta line on the monthly or weekly options contracts. The algos flip short like a switch when breaching this line that gives us that short term spike down wheee we all crave to get some fast $$$. Otherwise, whenever price is trading above the Put line we can stay true to the low vol drift and float like a jelly fish. Institutions are in charge of these markets and they are protecting their assets.

So the next time (next week) we hear the bears start panicking and the talking heads are talking shorts, just nod and look for the Put Delta on the monthly and weekly contracts. Better yet, create an algo for that like the institutions do. Otherwise, drift long and prosper.

Just FYI, I do have a way to capture low drift in the PT slope. I am dusting that off as we speak to make it the forefront of my equity index strategies until further notice. :)

Trade well~