Queda dos juros diminuiu rendibilidade da banca até março

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Curioso, vai buscar o trabalho do sornette...

FRIDAY a.m.
August 29, 2003



Self-fulfilling Prophecies
by David Nichols

The long summer grind is coming to an end, thankfully, and the market is now set to tackle the traditionally difficult September/October period.

By now the seasonal weakness in equity markets during these months is a completely mainstream market concept. There's nothing secret about it; in fact, you'd have to say it's quite the opposite situation, and everybody knows about this phenomenon.



So if everybody knows about this difficult stretch, why does it continue to be difficult year after year? Why is this not one of those situations where the crowd gets it wrong? There's only one explanation, and that is this weak period is a self-fulfilling prophecy. People expect stocks to go down, so they are on the defensive, and quick to punt shares early to avoid further damage. This leads to rolling waves of selling, as those left holding stock start to think "here we go again", using their own particular decision making process.

It's an especially combustible set-up this year, as bullishness and complacency are at extremes. The VIX has been hovering in the low 20s -- and even the teens -- all summer. Over the last 3 months, since the June 6th spike high, the bulls have nothing to show for their bullishness. They've simply enjoyed a market that hasn't go down. The bears also have nothing to show for their bearishness. Nobody does. It's a stand-off. The only people making money this summer have been the quick traders, like Mohan at our own 21st Century Futures. But for position traders, it's been a frustrating grind.

But that's okay. The market doesn't always offer opportunities. But the markets are not going anywhere, and we have plenty of time. This drifty summer is setting up an explosive fall through spring period, which I think could be one of the most volatile and wild of our financial careers.

The wilder action should kick off some time over the next few weeks. So let's all have a nice, relaxing long weekend, and get ourselves rested and ready for some market craziness over the next nine months.

I've talked before about how volatility is anti-persistent, and has a statistically proven tendency to do the opposite of what it's just done. This extended period with a low vix and low volatility is now set to be followed by a period of a rising VIX and rising volatility


Of course a rising VIX and rising volatility is highly correlated to a market that is selling off. So we'll be ready.

I also like how Professor Sornette, whose work I've mentioned often, has applied his "Log-periodic power law" formula of the distinctive oscillations seen in post-bubble markets to the VIX, to come with a likely path for implied volatility over the coming period.

Here's Prof. Sornette's model for the VIX with his explanation, which of course I like because it fits in well with how I see this next period unfolding:



A VIX moving back up to this extent -- and I think it could go over 70 or even higher in the final cleansing washout of all this bullishness -- will then be a tremendous opportunity to go long in a big way. To "bet the farm", even. This should be the point where the multi-year cyclical bull market gets kicked off, right when every last bull is selling out in a panic.

During this down period, some major money can be made on the short side, but there should also be some opportunities to make good money owning silver and gold, and their associated stocks, if you're not comfortable with loading in on the short side. So we'll have a plan in place once all this craziness starts to unfold, with an eye towards turning around and loading up long when everybody else has "sworn off stocks for good".

Sentiment Dashboard


SENTIMENT TANK: Drained 5 points to 8% full of negative sentiment.

SHORT-TERM: Hourly gauge is in an advance phase.

MID-TERM: Remains at a neutral 81/19 reading. This Stochastic has neither crossed below 80 nor crossed its %D (trigger) line so we still do not have a real sell signal on it. Confidence went bullish another peg to a bullish 2.

LONG-TERM: Weekly gauge backed up 2 points to 8% on the decline side. If this gauge backs up one more point to 7% on the decline side we'll be in a neutral phase for yet another week.

BOTTOM LINE: Our short-term bullish bias as discussed in Thursday morning's Agile Trader Pre-Market Update (owing to the high Put/Call Ratio and the 1.85 ratio of the VIX/20-day Hisorical Volatility) got some follow-through, though not much on the SPX. It looks like the SPX will close out the last week of August near the top of its summer trading range (absent an unexpected shock on the macroeconomic news front). Does the market have the juice to get over SPX 1015 and close at a new high? With the sentiment tank down at 8% full of negative sentiment an SPX breakout is unlikely on the strength of a wall of worry. The Put/Call Ratio fell to 0.61 on Thursday. A couple more days like that and the market will be ripe for a local top. It would take an influx of NEW LIQUIDITY for the SPX to follow the COMP, S&P Midcap 400, and Russell 2000 into breakout mode.