Market players have been wrong about the possibility of an increase in volatility for a very long time but the dramatic action this past week has finally helped to trigger some big swings. It is likely that the blowup of the short volatility trade on Monday and Tuesday is the primary cause of this major shift in market character. No longer are we setting one-way action which was very evident today as the V-shaped bounce try failed badly.
Many market players do not yet fully understand or appreciate what has shifted. For years there has been some huge trades in place that supported slow, steady one-way uptrends. The instruments and methodology used are complex but they fell apart this week and are still in the process of being unwound.
What we are seeing now is a return to more normal market action where human emotions are what moves stocks. Human emotions are very messy and inconsistent and that was reflected in the action we saw this afternoon when the indices went up and down like a yoyo.
There is going to be a period of uncertainty as the market digests this change and the risk of downside is going to be much greater. Old fashioned technical analysis may actually start to work better now that the machines are no longer as dominant.
Although the indices ended up in the red, there was some good individual stock action particularly in the biotechnology sector with names like Sangamo (SGMO) , Abeona (ABEO) and Viking Therapeutics (VKTX) making good moves. There were some pockets of weakness as well with the FAANG names, semiconductors and oils being notable poor.
Many traders have grown used to the artificial action that dominated for many years. They will need to change their approach to more effectively deal with this market. This is the most significant change we have seen in a long time and it will require a different mindset.
Have a good evening. I'll see you tomorrow.