Tuesday, March 31, 2015

NASDAQ volatility remains king

That was a very nice gain for NASDAQ on Monday, but it did seem a little bit too good to believe. A significant portion of the gain was likely due simply to short covering. There are probably still more than a few hedge funds out there who think the market should go even lower before it goes higher. Granted, they were forced to cover those bets yesterday, but there is a very good chance that they will be back, with a vengeance, as soon as upwards momentum peters out. In fact, it appeared to me that upwards momentum did peter out fairly early in the day, with the close only fractionally higher than it was at 1:30 PM and only 6 points above the level it hit at 9:48 AM. IOW, the rally did not advance very far above the level it reached a mere 20 minutes after the open. That is not a good sign.

To be clear, the hedge funds are still in charge and we have no way of knowing exactly what they have in mind for the coming days and weeks and months. But we can be sure that  there will be plenty of volatility.

NASDAQ futures are down fairly sharply this morning, indicating a significant pullback at the open, and not on any truly dramatic catalyst. My belief is that this pullback is merely payback for the forced short-covering of Monday. Ouch. As always, futures and the opening move are not reliable indicators of the trajectory of the market for the rest of the day. The opening pullback could lead to another dramatic sell-off, but it could also lead to selling exhaustion, which could then lead to a dramatic recovery, maybe even to a net gain for the day, all with equal probability.

It all comes down to how many hedge funds stick with their current trading bias, how many of them switch to a more aggressively bearish risk-off bias, and how many of them switch to a more bullish risk-on bias. Even if most hedge fund traders make no net change, a few can tip the balance in either direction, and that balance can shift rapidly and frequently, leading to an excess of market volatility.

We are still indeed locked in a trading range, with volatility being the main driver. Hedge funds will switch or double down on their risk bias based on which market direction seems to be the path of least resistance and the quickest profit potential, which varies from day to day, and even hour to hour.

It looks like my SEP-IRA retirement contribution funds are cleared. I'll leave most of the cash as reserve and incrementally open positions on dips and bargains. There are probably a few positions I will open anyway, but mostly I will be opportunistic. I'll also keep some reserve or at least park some of it in some relatively safe stocks that I can then reallocate for great opportunities as they appear. All of my trades will be posted on my Seeking Alpha feed.

My short-term trading will be a bit limited for the next few weeks or so as I recover from the loss of a substantial capital cushion as I pay my taxes and estimated taxes on April 15th. I also need to pay more attention, for the moment on allocation of my retirement accounts. Still, I do expect to do at least some short-term trading, especially as volatility gives us some big dips.

-- Jack Krupansky


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