Trading Portfolio September 25

Meta Strategy Trading Portfolio – Probability Map Update.

Swoon Season.

Despite quite a few market studies that pointed to a different outcome for this September, seasonal weakness is playing out as usual.

The interesting part about it is this year’s widespread anticipation of weakness and accordingly a reduction in stock market exposure and increased short positioning in advance, which tends to reduce (or reverse) the actual event – but not so this time around.

Sometimes the obvious base case simply prevails, but we are now nearing a major confluence of support in price and time.

Trading Portfolio September 18

Meta Strategy Trading Portfolio – Probability Map Update.

An obvious window of weakness!

Everyone who keeps an eye on markets knows that the coming week is destined to be the weakest of the year according to the seasonal return calendar.

Unfortunately, the word obvious doesn’t jibe well with a reflexive, uncertain market.

If everyone knows something is very likely to happen, aren’t they all going to try to get out in front of it?

Or are investors going to react to the first signs of weakness and keep up the selling pressure, thereby creating a self-fulfilling feedback loop?

Trading Portfolio September 11

Meta Strategy Trading Portfolio – Probability Map Update.

Higher Low.

The S&P500 made a higher low in the middle of last week, which is unusual for a low retest during a correction, as this tends to happen directly.

It is a point in favor for a short-lived summer consolidation that may already be in the process of ending.

In combination with a number of positive market studies, this is sufficient reason for me to begin to tilt my trading position long for an anticipated end to the current pullback.

Trading Portfolio September 4

Meta Strategy Trading Portfolio – Probability Map Update.

Golden September?

September leads the statistic as the worst month of the year for all major US stock indices, which would fit well with the consensus expectation of a drawn-out consolidation in equities over several more weeks.

However, alternative scenarios of an early golden season have emerged from several independent sources backed by convincing data.

Top of my list is a strong divergence of volatility against its usual seasonal pattern, which may foreshadow a positive path for equities.

VIX tends to move significantly higher between mid-July and mid-October, but broke this tendency this year by nearing multi-year lows last Friday. This may cause a positive feedback loop of flows into equities.

Trading Portfolio August 28

Meta Strategy Trading Portfolio – Probability Map Update.

– Positioning Update –

The Sentiment Reset.

A 6% S&P500 drawdown was sufficient to completely reset positioning and sentiment extremes.

In the beginning of the month it seemed like nothing could ever derail the fresh “teflon” bull market, but only a few challenging weeks later social media chatter is turning back to doom and gloom.

I would argue that this is an inherent feature of a new bull market: With painful declines in stocks and bonds fresh on our minds, any new weakness quickly turns from golden opportunity to a specter of fear.

To control our emotions a look at cold, hard data can help. There are quite a few new studies discussed today that support the thesis of a benign pullback (i.e. new highs ahead within weeks).

Trading Portfolio August 21

Meta Strategy Trading Portfolio – Probability Map Update.

The Pullback Accelerates!

In the vulnerable period around monthly option’s expiration, the decline across all stock indices gained in momentum.

In a flurry of trades the trading portfolio has switched from short to long exposure.

While several small trades will be taken, if an anticipated pullback pattern plays out, my focus will be to position for the rally after the pullback over the following months.

The current decline remains an opportunity to buy the dip.

Trading Portfolio August 14

Meta Strategy Trading Portfolio – Probability Map Update.

– Positioning Updates –

The Canary in the Coal Mine.

By analyzing the speed and volatility of a pullback in progress we can separate the wheat from the chaff.

We can use specific indicators to distinguish benign pullbacks, which are great buying opportunities the majority of the time, from serious events that increase the probability of further declines.

So far the current drawdown of 3,8% is progressing slowly and orderly.

Trading Portfolio August 7

Meta Strategy Trading Portfolio – Probability Map Update.

The Pullback Begins!

Just as soon as prominent mega-bears throw in the towel and declare a bull party to be on, the anticipated stock market decline begins.

I think this will be a major opportunity to position long for the 4th quarter.

With the first pullback in a new bull market on its way, it is time to re-activate two bull-market trading strategies: The “Buy The Gamma Dip” and “Pullback Retracement” setups.

Trading Portfolio July 31

Meta Strategy Trading Portfolio – Probability Map Update.

Relentless Rally.

Despite a serious attempt at a reversal last Thursday, the S&P marches on relentlessly.

While this continues, little will change in most of the indicators on my radar.

Sentiment and positioning incrementally become more and more extreme until something finally breaks.

Trading Portfolio July 24

Meta Strategy Trading Portfolio – Probability Map Update.

Where is the real money made?

While in the midst of trading on the short side in an overbought market, I pose an essential trading question with an obvious answer that is nonetheless easily forgotten in the heat of the moment:

Where is the real money made in a bull market? The best opportunities are found on the long side and shorting is really hard!

I look at how an integrated trading and investing framework can help to navigate the trade-offs.

Trading Portfolio July 17

Meta Strategy Trading Portfolio – Probability Map Update.

Top Formation?

The million-dollar question: Are we in the midst of a multi-week top that is slowly forming between last week’s high and a potential neckline around 4330?

I’m willing to put a moderate bet on this scenario, because it is supported by yet another VVIX/SPX correlation signal, which tilts current probabilities to favor outright short exposure.

Trading Portfolio July 10

Meta Strategy Trading Portfolio – Probability Map Update.

Positioning Update Monday / Thursday

Bears – an endangered species.

Large speculators are cutting their short positions at the fastest pace since the summer of 2020.

This contributes to a dynamic increase in overall equity positioning, which usually follows a typical pattern: once another major group of investors has been pulled back into the market or been squeezed out of short positions, it is time for a period of consolidation to begin.

This re-charges the market for the next leg higher.

Trading Portfolio July 3

Meta Strategy Trading Portfolio – Probability Map Update.

New all-time highs in sight?

Another shallow dip was bought even faster than expected. Will this catapult the S&P500 to new highs?

Yes, I think new all-time highs are likely to be reached during the FED Pause due to the powerful momentum that has been building over the last months.

However, such rallies rarely happen in a straight line. Once another major group of investors has been pulled back into the market, it is time for a period of consolidation to begin.

Trading Portfolio June 26

Meta Strategy Trading Portfolio – Probability Map Update.

June Swoon.

The S&P follows June’s seasonal post-quarterly-OpEx pattern to the tee and is down after a cluster of volatility warning signals.

A real summer pullback has some ways to go yet, as I would expect it to bottom out somewhere between the 60 dma and the 275 dma.

There, I see a major opportunity to position long for a continuation of the FED Pause rally.

Trading Portfolio June 19

Meta Strategy Trading Portfolio – Probability Map Update.

Blow Off Top!

A long anticipated blow-off top with a distinct volatility up / market up dynamic arrived in full force last week.

This is highly likely to occur shortly before the next large pullback.

Such a momentum rally can easily surpass expectations once it starts to get going, but as the saying goes: “The higher they climb, the harder they fall”.

Trading Portfolio June 12

Meta Strategy Trading Portfolio – Probability Map Update.

Positioning Update Thursday.

OpEx Week with Vol Warning!

A trifecta of warning signs is signaling an increased risk for a temporary stock market pullback amidst a long-term constructive environment.

In addition, we have hit a major target and significant resistance at S&P 4300 and I think it’s time to reduce stock market exposure temporarily.

Trading Portfolio June 5

Meta Strategy Trading Portfolio – Probability Map Update.

Positioning update Wednesday to Friday.

Debt Ceiling Vol Collapse.

The debt ceiling issue got resolved last week with less fuss than a significant part of the market expected and volatility simply collapsed as stocks rallied into the weekend.

It is an interesting situation, because I see the debt ceiling resolution as a medium-term headwind rather than positive for equities.

A forthcoming burst issuance of T-bills from now to September could re-ignite QT and drain liquidity from the market.

Trading Portfolio May 29

Meta Strategy Trading Portfolio – Probability Map Update.

Bull Market Trading Concept.

If anything can happen at any time in financial markets, why is it that one can take leveraged risk in a Quiet Bull Market Regime and have a very good chance to get away with it?

Human tendency to process and adjust to change slowly will lead to a lag in behavior resulting in a predictable pattern.

The first, violent stock decline in a bull market almost inevitably leads to a bounce that quickly retraces part of the drop before the market gets into serious trouble.

Well planned, one can scale into the first violent dip, then get out in the bounce with a profit or a small loss, when the market regime changes.

Trading Portfolio May 22

Meta Strategy Trading Portfolio – Probability Map Update.

Significant New Highs!

Of course, last week’s breakout could turn out to be a trap, but stocks are advancing above a significant bull / bear watershed.

Prevailing skepticism gives the nascent bull market the potential to keep advancing for quite a while.

I will keep adjusting my blueprint for the months to come as the path of the rate hike cycle unfolds.

My basic expectation for the most probable path for stocks boils down to the following key pivots:

FED Pause = Stocks Up
First Rate Cut = Stocks Down
Last Rate Cut = Stocks Up

Trading Portfolio May 15

Meta Strategy Trading Portfolio – Probability Map Update.

FED Pause vs FED Cuts.

Zooming out to analyze the uncertain path of the current economic cycle.

It hinges on a complex interplay between inflation, interest rates and the economy’s resilience.

The path of the FED’s interest rate policy is uncommonly clear: We are likely to have reached an interest rate plateau, which is usually followed by rate cuts.

It is important to differentiate between these stages, as well as view today’s cycle as conditional to a high inflation environment.

Trading Portfolio May 8

Meta Strategy Trading Portfolio – Probability Map Update.

Still range-bound after all these months…

Stocks keep battling with a ceiling at S&P 4200-4300, as they have been for months.

At the same time each attempt to trigger a serious decline is quickly followed by a renewed run aiming for another breakout.

The public discussion and economic reality mirror this feeling of being trapped.

A recession looms on the horizon, as the FED is finally preparing to pause interest rate hikes and Season 2 of the banking crisis has started playing.

But the technical landscape keeps pointing to a higher probability for a break above resistance, which is supported by skeptical sentiment and timid positioning.

This would clear the air and put stocks solidly into the recovery half of this market decline.

Trading Portfolio May 1

Meta Strategy Trading Portfolio – Probability Map Update.

An Opportune Bear Trap!

The S&P dropped to my targeted key support area and swiftly recovered an important trendline last week, which turned out to be an excellent buying opportunity.

Failed moves tend to leave short-term positioning trapped, which now gives stocks a chance to take a successful run at an area of heavy overhead resistance.

Because big, medium-term short positions are also caught on the wrong foot, this could lead to a larger unwind, creating a powerful feedback loop of positive flows that continue to drive the market up over the next months.

Clearing the 50% bear-market retracement area is an important stepping stone on the way to recovery – mere bear-market rallies rarely overcome that threshold.

Trading Portfolio April 24

Meta Strategy Trading Portfolio – Probability Map Update.

– Positioning Update Wednesday –

Opex Pin.

The S&P500 has ended up exactly where it started last week and is stalling below an area of heavy overhead resistance. This is typical for a market that was pinned into monthly options expiration last Friday.

Because the positive shift in sentiment and positioning is only just beginning, I see a decently high probability that supportive technicals paired with flows will continue to drive the market up over the next months. Returning confidence after a successfully endured crisis can create a powerful, positive feedback loop.

Depending on the trajectory of the economy, we may be facing a significant correction come summer or fall. I’m looking for a tell-tale volatility up / market up dynamic (a blow-off top) to occur before the next leg down.

Trading Portfolio April 17

Meta Strategy Trading Portfolio – Probability Map Update.

Sentiment is shifting!

There is nothing quite like a good rally to inspire a shift in overall market sentiment.

Even macro market commentary is becoming more nuanced: While an economic slowdown remains the consensus, more room is given to alternative scenarios about how this may play out in the stock market.

A big nothing-burger in economic news has implications for stocks when viewed through the lens of volatility:

Nothing means up.

Additionally, positioning by asset allocators follows swings in sentiment and both of these factors have plenty of room to run, before the see-saw tips to the other side.

Trading Portfolio April 10

Meta Strategy Trading Portfolio – Probability Map Update.

Bull Market Rebirth.

Just in time for Easter, the systematic Meta Strategy model signaled a return to a “Quiet Bull Market Regime”.

From past experience, I know that quiet bull markets are the best environment for my trading approach.

The systematic market regime definition is not a forecast, but merely analyzes the state the stock market is in at this moment in time. There is trading alpha to be found, because market environments tend to stick around.

A mindset that embraces uncertainty and retains the ability to continuously adjust trading scenarios, as we move forward in time, has served me well.

Trading Portfolio April 3

Meta Strategy Trading Portfolio – Probability Map Update.

In the eye of the hurricane.

Blue sky is opening up above as calm returns.

Despite the storm clouds visible all around, stocks are making important technical breakthroughs.

This opens a window of opportunity for a rising market over the next months, as falling volatility begets low volatility amidst a rise in price.

Returning confidence after a successfully endured crisis can lead to stocks climbing a wall of worry much longer than expected.

However, the danger of systemic risk contagion continues to lurk below the surface.

Trading Portfolio March 27

Meta Strategy Trading Portfolio – Probability Map Update.

– Wednesday (close): positioning update –
A Whole Lot of Nothing.

Equities remain in essentially the same place they were last week:

No crash – No rally.

The S&P is range bound, which is quite astonishing in light of the super-negative economic outlook amid one of the steepest US rate hiking cycles in history, and an ongoing banking crisis.

The longer this relative stability holds, the more likely it becomes that the general tendency for stocks to rise establishes itself.

It may come down to something as simple as a seasonal tailwind, which is maximally positive for the next two months – if systemic risks remain under control.

Trading Portfolio March 20

Meta Strategy Trading Portfolio – Probability Map Update.

Crisis Averted.

Governments have quickly implemented a circuit breaker to stop a burgeoning bank run by providing emergency funding.

This has several immediate results, which point to near term stability and a tailwind for stocks.

Is this the end of it? Probably not.

This uncertainty was visible in the extremely erratic price moves in the stock market last week, but a technical view at the market shows an improving picture.

Trading Portfolio March 13

Meta Strategy Trading Portfolio – Probability Map Update.

Panic on the Titanic!

This is one of those weeks of peak uncertainty when the market picture can turn upside down within days.

Trouble in the banking system put the S&P under new pressure last week, as investors fear a game of dominoes just like it was 2008.

The key question we are facing is: Are stocks still in a healthy consolidation period after a massive rally, or has the next leg down begun?

Volatility, technicals and fundamentals paint a relatively neutral picture still, but a lot depends on the on-going dynamic of the developing banking crisis and the FED’s reaction to it.

Trading Portfolio March 6

Meta Strategy Trading Portfolio – Probability Map Update.

Late Week Impulse.

Last week’s indecisiveness in the stock market was finally resolved with an impressive bounce right from the bottom of the key support area that we had been watching.

Apart from constructive technicals, I see strengthening signs that fundamentals are beginning to follow price.

Bearish macro analysis may be fighting a battle that is already in the rearview mirror.

Trading Portfolio February 27

Meta Strategy Trading Portfolio – Probability Map Update.

Stability keeps the upper hand.

Stocks followed the script of continued weakness after February OpEx and stabilized right at the key levels noted in last week’s outlook.

This perfectly re-tests the breakout above the 2022 downtrend.

A resilient stock market in light of bad news during a vulnerable period is an impressive sign of strength.

This forms a potential base for a sustained advance.

Trading Portfolio February 20

Meta Strategy Trading Portfolio – Probability Map Update.

Traders are being played!

Unless one bets on intra-day mean-reversion, traders are being played by the countless reversals in this ping-pong market.

Since the FOMC decision, we saw multiple 1%-2% reversals before Friday’s feeble attempt to break the market’s range to the downside.

This is typical for a stock market stuck at a crossroads between two major market regimes.

How decisively currently missing support from the options market manages to impact stock prices will be the key thing to watch over the next week.

It remains a tug-of-war between positive technical indications and a negative fundamental outlook, and so far the tendency is for the market to remain stable.

Trading Portfolio February 13

Meta Strategy Trading Portfolio – Probability Map Update.

Hanging in the Balance.

The stock market is at a crossroads between two major market regimes: Will recent price strength and breakouts be confirmed, which would start a Quiet Bull Market Regime, or will the current rally fail at the last minute?

As convincing as the recession scenario may be, price remains what we ultimately trade.

Decision time falls straight into OpEx week, which opens a window of vulnerability.

Trading Portfolio February 6

Meta Strategy Trading Portfolio – Probability Map Update.

Everybody Pivots Bullish!

It is never easy, is it? Despite a plethora of fundamental indicators triggering a recession warning, technical indicators increasingly paint the opposite picture.

So, which side will turn out to be right? As is the nature of the game, we will only be able to tell in hindsight, whether we are witnessing a regime change or whether we see an uncommonly large rally before the next shoe drops due to a delayed recession.

Rather than choosing one side, I fall back to my Meta Strategy model to systematically define a market regime and trade accordingly.

Trading Portfolio January 30

Meta Strategy Trading Portfolio – Probability Map Update.

Let the Breakouts Begin!

With a break above a major falling trendline a significant technical hurdle was taken last week. Positive market breadth and a new quiet volatility regime have been broadly supportive for this move over the last weeks.

This goes hand-in-hand with a change in the fundamental narrative: The perfect combination of rapidly falling inflation, while avoiding a recession, is seen as a more and more probable scenario.

But those recent green shoots have a high probability of remaining temporary, as immaculate disinflation is a very narrow path to walk. Any deviation would bring us back to the recessionary bear market scenario.

Trading Portfolio January 23

Meta Strategy Trading Portfolio – Probability Map Update.

Quo Vadis?

Where is the market going?

There are more questions than answers, as two camps remain quite evenly matched in the current tug-of-war.

On the one hand, the convincing thesis that this bear market is not over continues to have several solid arguments to its name – this is the forest.

On the other hand, stock prices and market internals have improved considerably, which comes with positive sentiment and a distinct change in the narrative – these are the trees.

Positioning and flow analysis may shine some light into the murky waters of the current market.

Trading Portfolio January 16

Meta Strategy Trading Portfolio – Probability Map Update.

Goldilocks Recession?

Market commentators are beginning to call a “goldilocks” phase, where inflation is temporarily contained and growth remains resilient.

It is a period of indecisiveness, when the pendulum can swing either way more easily than just a few weeks ago.

The light at the end of the tunnel is becoming brighter, but it may remain elusive, as the primary narrative shifts from inflation to growth concerns.

Threading the needle to a perfect soft landing is possible, but a lot can still go wrong.

I look closely at a question many investors are currently struggling with: When to change your mind?

Trading Portfolio January 9

Meta Strategy Trading Portfolio – Probability Map Update.

Range Bound

A stock market that seesaws sideways in a mediocre price range is one of the most frustrating market environments.

In hindsight, the last dozen trading days look like an opportunity to print money, but while a range is building, every decisive move towards its boundaries feels like a potential breakout.

The current choppy market is a sign of indecision. Bear market timing is getting trickier, as it is increasingly unclear whether a surprisingly resilient economy will manage to push back a recession to late 2023.

This opens up more potential paths on the way to a final bottom.

Trading Portfolio January 2

Meta Strategy Trading Portfolio – Probability Map Update.

Happy New Year

Let’s have a look at the main ideas around 2023 that are currently flooding my inbox:

Inflation
Nobody is able to predict it, but everyone has an opinion.

Recession
Yes, says the most consensus recession call ever.

The Stock Market 
The bullish view sees stocks closing decisively higher in 2023.
It tends to ignore the intra-year path that gets us there, and that’s where the bearish consensus lies: New stock market lows in the first half of 2023 as a global recession hits.

I don’t see any reason why both the bullish and the bearish view can’t come true – their difference is mainly one of time horizons.

Trading Portfolio December 26

Meta Strategy Trading Portfolio – Probability Map Update.

Front Running

Last Wednesday, many Santa Claus Rally believers positioned themselves for the “official” rally start on December 23rd causing a jump in stock prices.

Unfortunately, Santa continues the violently choppy market that defined much of 2022.

Tax-loss harvesting hits the worst stocks of the year, while high gamma concentration exerts a magnetic pull, which pins the market into 12/30 options expiration.

The traditional buying during the last days of the year may still be turned on its head during a down year!

Trading Portfolio December 19

Meta Strategy Trading Portfolio – Probability Map Update.

– Tuesday Update –

Santa Bounce

An apt characterization of this year’s market is a string of rollercoaster weeks: Violent reversals lead to quick sell-offs and even quicker rallies.

The current window of weakness remains in place until Wednesday’s Vixperation – right on time for the start of the seasonally strongest period of the year: The Santa Claus Rally.

Strength is still widely anticipated, but last week’s sell-off makes a Santa Bounce the most we can expect this year, and the effect tends to be subdued in down-years in general.

Fundamentals and technicals are now aligned and point to more downside over the coming weeks.

Trading Portfolio December 12

Meta Strategy Trading Portfolio – Probability Map Update.

Rally Peak?

With the current rally cresting a good week ago, the S&P fell back below its 20 dma last Tuesday and broke the steep upward channel from the October low on Friday.

This turn happened uncannily right where it was supposed to: At a falling trendline connecting the major highs of 2022.

Two major factors pose the greatest upside risk currently:
a) Strong seasonality with the Santa Claus rally period starting December 22nd.
b) Next week is filled with events that can drive the market any which way.

But, my base case recession scenario remains in place with fundamentals unequivocally pointing the way.

Trading Portfolio December 5

Meta Strategy Trading Portfolio – Probability Map Update.

– Wednesday Update: New trade –

Technicals and Fundamentals Diverge

We are now at a point in the relief rally where we see an increasing number of quantitative studies based on momentum, trend, and breadth show convincing positive return probabilities.

But, because the fundamental bear case remains exceptionally strong, I currently overweight the fundamental evidence until a regime change is indicated.

My belief is that this time is not different and a highly likely recession will have a strong impact.

Something serious will need to “break” in the economy, before the FED is forced to actually begin lowering interest rates.

This will most likely be reflected negatively in the path of the stock market.

Trading Portfolio November 28

Meta Strategy Trading Portfolio – Probability Map Update.

Magic Price, Magic Time

How reliable are index price levels or points in time that everybody has on their radar?

I take a closer look at the “magic” 200-day moving average that currently converges with a falling trendline – just above the current S&P 500 level.

The start of the year-end rally period brings to mind the question: Can such well-known anomalies persist and what might be the cause?

Trading Portfolio November 21

Meta Strategy Trading Portfolio – Probability Map Update.

Recession Watch

A US recession is coming in 2023.

A vast amount of individual leading economic indicators are pointing to that, and, even more convincingly, the most reliable recession prediction models that I know of.

I change my focus to pinpointing the actual beginning of a recession with minimum delay, as well as playing devil’s advocate by looking at diverging opinions.

Right now we are waiting to position ourselves for the first of two major opportunities: The final bear-market selloff.

Trading Portfolio November 14

Meta Strategy Trading Portfolio – Probability Map Update.

How to trade a recession?

The US economy is going to slip into a deep recession in 2023 with high (and steadily rising) probability.

But, at the same time we can say with confidence that we are not in a recession at the current moment.

Can we take advantage of these facts, if we take past US recessions as guidance?

The current relief rally provides a high probability entry with very good reward / risk to short the market for my main scenario.

Trading Portfolio November 7

Meta Strategy Trading Portfolio – Probability Map Update.

Ping Pong Market

The unpredictable, news-driven reactions of the stock market last week show that it has found an extremely volatile equilibrium for the time being: positive seasonality combined with the tailwind of falling volatility battles against very hawkish FED messaging supported by stable unemployment numbers.

There is no edge in trying to predict how this will resolve. This week’s CPI and midterm elections are potent news events that can keep the pinball ricocheting every which way.

My number one goal in the current market environment is to preserve capital.

Trading Portfolio October 31

Meta Strategy Trading Portfolio – Probability Map Update.

– Wednesday Update: FOMC Reversal –

Capitulation or Shrug?

The S&P has formed a (temporary) bottom by breaking above 3800, which is likely to be the basis for an advance that will be with with us over the next couple of weeks.

FOMO will start to take over as the year draws to a close, because few professional investors can afford to be caught out missing another strong rally in a year of miserable performance.

However, if this is accompanied by a lack of hedging, it puts the market in a fragile state that is vulnerable to a potential tail event in 2023.

Trading Portfolio October 24

Meta Strategy Trading Portfolio – Probability Map Update.

Is the Bottom In?

Short answer: a temporary, tradable bottom is probably in, but chances are that the low is still to come.

An entire month of heightened volatility and the VIX futures term structure in backwardation has set up a coiled spring of volatility in nervous anticipation of an important double event: the FOMC meeting and midterm elections.

The majority of outcomes for these events are likely to provide the catalyst for a volatility-crush rally in November.

This in turn has the potential to trigger a wave of buying from active investors into year-end.

They currently have a very low exposure to equities and their big risk is to miss out on the upside.

Trading Portfolio October 17

Meta Strategy Trading Portfolio – Probability Map Update.

Update Tuesday at market close

One-Minute Washout

Thursday’s CPI number acted as a catalyst in a volatile setup and caused a 1-minute market crash of 3,5%.

But rather than deteriorating into a lasting liquidity spiral, the market quickly stabilized and instead rocketed to new highs.

By moving up 5,5% from the day’s low in a matter of hours, the S&P 500 staged the fifth largest reversal from a 52-week low in its history.

However, on Friday all post-CPI gains were given back, and we remain in a dangerous situation going into Friday’s OpEx.

Trading Portfolio October 10

Meta Strategy Trading Portfolio – Probability Map Update.

Danger! OpEx Ahead

Last week showed that put options-driven rallies tend to be unsustainable, as the structural demand that is triggered by an initial positive catalyst acts like lighter fluid thrown into a fire – violent, but short lived.

As the short-term trend at the 20-day moving average stopped the advance like a brick wall, this was a strong indication that no genuine demand was supporting the rally attempt.

That puts us into a dangerous situation over the next two weeks.

A new negative catalyst (a low unemployment rate means “tighter for longer” after all) may prove to be more sustainable and lead us to new lows.

Such a dynamic would find its logical conclusion at monthly OpEx, when put options, which now drive an increasing negative gamma squeeze the further we fall, expire.

Probability Map October 3

Meta Strategy Derivatives Portfolio – Probability Map Update.

Update Tuesday – Target Level Change

What Now?

Things are getting murkier, as messages from new data are mixed.

It’s time to lock in profits from our remaining short position, while keeping options open for the near future.

Bottom picking is difficult, especially as long as an overall downtrend is firmly in place, and the big macro picture points to a distinct possibility of significantly lower lows ahead before this bear market is over.

As a vast majority of traders seems to be highly convinced that this is already a certainty, a reset of negative sentiment, and with it positioning, looks to be the more likely immediate path.

In the current conditions a small catalyst can easily trigger a strong rally at any time.

Times like this, when views over different time frames cease to align in a volatile, fragile environment, are periods to be very careful.

Probability Map September 26

Meta Strategy Derivatives Portfolio – Probability Map Update.

Volatility Sends a Warning

After retesting the June low, we are still missing another ingredient of the second-leg-down scenario: The capitulation sell-off that will entice long-term buy-and-hold investors to finally throw in the towel.

As long as the FED’s trajectory remains as it is, capitulation is likely to occur, because the indications for a deep recession in 2023 increase steadily.

However, chances are good for a period of stabilization first, which is reflected in the probability map’s neutral assessment for the last part of this year.

Probability Map September 19

Meta Strategy Derivatives Portfolio – Probability Map Update.

Everything Down – Again!

Stocks, bonds, gold, crypto – you name it and it was probably down this week, as nothing escaped a worse-than-expected CPI print on Tuesday.

This shows again just how difficult this year’s investing and trading environment is, when there is nowhere to hide but in cash, the dollar, or outright short positions.

An OpEx week gamma pin has now been released, as options expired on Friday, and the market has a good chance to move freely in the direction it has been trying to push towards all week: Down.

Probability Map September 12

Meta Strategy Derivatives Portfolio – Probability Map Update.

Tuesday Update

Positioning Extreme

As we are looking at a market picture that is essentially the same as last week, I will take the opportunity to take a deeper dive into the most extraordinary data point that has recently crossed my screen.

A chart shows a huge amount of money spent on put options by large traders, which surpasses the GFC extreme by a factor of nearly 4.

Widespread comments view this as an extremely bullish sign, as everyone looks to be over-hedged, which makes it hard for the market to go down.

But reality might be more nuanced than this easy interpretation.

I see a stable footing at the cliff’s edge with a negative gamma squeeze lurking just below as quarterly OpEx is coming up.

Probability Map September 5

Meta Strategy Derivatives Portfolio – Probability Map Update.

Sit back and let it ride…

Sometimes an overwhelmingly bearish expectation by investors will simply turn out to be a self-fulfilling prophecy, rather than a contrarian signal.

Jerome Powell’s speech at Jackson Hole was such a widely expected catalyst and a decisive point for future market direction.

His concise message of “No Pivot” to come from the FED is all that matters for the moment.

There is no need to go bottom fishing just yet, even though we have now reached the area of the major May low.

Odds are still well in favor of expecting further downside, as we enter the most negative and volatile period of the year.

Probability Map August 29

Meta Strategy Derivatives Portfolio – Probability Map Update.

Don’t Fight The Fed

The setup for a second leg down has been in place for the entire month of August, because sentiment and positioning increasingly changed to a bullish outlook, continuously building up more potential sellers with weakly held conviction.

Jerome Powell’s speech at Jackson Hole was widely expected to be a potentially decisive point for future market direction.

Astonishingly, that is exactly what seems to have occurred: His short and concise message of “No Pivot” to come from the FED may have been the catalyst that is needed to let the downside setup play out.

Like a game of dominoes, a wave of selling hits an under-hedged market.

A negative gamma spiral can easily ensue, as investors scramble to buy protection.

Probability Map August 22

Meta Strategy Derivatives Portfolio – Probability Map Update.

– Update Tuesday –

OpEx Cycle

The interval from Vixperation to OpEx remains a consistently weak period.

For my longer swing-trading time frame, I pay more attention to the tendency that big options expirations often mark the beginning of large directional moves, as well as turning points in the market.

Monitoring social media, it is palpable that sentiment can pivot on a dime at any moment.

A relatively small catalyst has the potential to trigger a run for the exit, as a cautious stance remains deeply ingrained with many traders.

Probability Map August 15

Meta Strategy Derivatives Portfolio – Probability Map Update.

Relentless Rally

The stock market advance continues towards its long-term downtrend.

I turn to the big question on everyone’s mind today: How can we distinguish whether what we see is still a bear-market rally, or whether the difficult FED goal of a “soft landing” can be achieved and lead straight to a new bull market?

We can never be certain about the future path, but we can observe how different data points shift probabilities and position ourselves accordingly.

Current data still points to a bear-market rally setup.

Probability Map August 8

Meta Strategy Derivatives Portfolio – Probability Map Update.

A Confluence of Time and Price

A compelling opportunity on the short side is approaching.

The key idea, that a V-shaped bear-market bottom a la 2020 is very unlikely, has been cemented further by Friday’s strong unemployment numbers, which make the necessary dovish FED pivot almost impossible due to its dual mandate.

The current confluence

A look at recent OpEx cycles shows consistent weakness in the 5 – 10 trading days before monthly options expire.

This often happened in combination with a consolidation period in the beginning of the month that fails to overcome a significant resistance area.

Probability Map August 1

Meta Strategy Derivatives Portfolio – Probability Map Update.

A Change is in the Air

Can you feel how investor sentiment is brightening by the day?

“Nothing like price to change sentiment”, but this is exactly what defines a proper bear-market rally for me: A reset of sentiment and positioning that creates fresh potential sellers in the market.

The current rally is beginning to set up an under-hedged market vulnerable to a steep sell-off.

Probability Map July 25

Meta Strategy Derivatives Portfolio – Probability Map Update.

Second Leg Down Theory

The current relief rally is awakening expectations of a lasting stock market bottom.

But not so fast! I explore why extreme sentiment and positioning make bear-market rallies a necessity.

They often set the market up for another drop, especially if long-volatility hedges have disappointed so far.

Probability Map July 18

Meta Strategy Derivatives Portfolio – Probability Map Update.

The boring part of a bear market

Is it still a bear-market rally, if the market doesn’t … rally?

Lacking any kind of decisive directional move, it is useful to look at the length of time the S&P spends above its current bear market low.

Extremely pessimistic sentiment is slowly beginning to normalize, but it still has plenty of room to go, until bearish investors are lulled into complacency.

Meanwhile, fundamental data continues to quickly deteriorate, and the decisive phase of this bear market is still to come.

Probability Map July 11

Meta Strategy Derivatives Portfolio – Probability Map Update.

Slow and Steady

Three steps forward, two and a half steps back — that’s what a classic bear-market rally looks like.

Rather than seeing a deep, recessionary bear market as the only path, I prefer to keep an open mind for a wide variation of possible outcomes in the current, unpredictable situation.

On the next leg down, I will monitor closely in which direction the probabilities between our three main scenarios are shifting.

Probability Map July 4

Meta Strategy Derivatives Portfolio – Probability Map Update.

— Update Tuesday; Leading economic indicators have triggered a yellow recession warning in July —

Bull vs Bear

The nascent recovery rally ran into trouble at the lower end of my minimum long target last week, which led to a tug-of-war between bulls and bears with no decisive winner.

Friday’s close above the key level at 3800 makes the washout below look like a classic bear trap that cleaned out all the stops, only to reverse back above.

Last week’s scenario layout still looks solid and is supported by a vast majority of the data: The current rally should last longer and go further than previous bounces until extreme pessimism normalizes — a classic bear-market rally.

After that we will likely see a decline of several hundred S&P points, even in an optimistic scenario.

Probability Map June 27

Meta Strategy Derivatives Portfolio – Probability Map Update.

Like a Charm

Last week’s OpEx long setup worked like a charm.

We are now facing a set of diverse scenarios for the near future.

Because these share key features (a lengthy, strong recovery followed by significant downside), a flexible trading plan has a high chance for success.

Probability Map June 20

Meta Strategy Derivatives Portfolio – Probability Map Update.

A detailed look at gaining a significant behavioral advantage during bear markets by using a tactical investment model.

It can save us from the human tendency to make bad investment decisions at the worst of times.

With the S&P trading 17% below the long-term trend and extremely oversold breadth numbers after one of the worst bouts of selling in its history, we are once again close to an intermediate bottom.

The current setup is remarkably similar to the situation in mid-May, when stocks bottomed on monthly OpEx Friday and rallied 10%.

This pattern of a sell-off cascade that is mechanically stopped by a significant options expiration date, because the reflexive, negative feedback-loop of dealer hedging resets, is a powerful edge that remains in this otherwise highly unpredictable market environment.

Probability Map June 13

Meta Strategy Derivatives Portfolio – Probability Map Update.

High Failure Rate

Friday’s high CPI print derailed another promising setup, as bad news instantly turned a contrarian take on sentiment into a self-fulfilling prophecy instead.

The remaining traders with long positioning all stampeded for the exit at once, and a low liquidity environment and negative gamma exposure did the rest.

The stock market is now likely to quickly retest its recent lows with the potential to trigger a dangerous liquidity cascade down to much lower levels, which would be driven by a negative put-gamma squeeze into quarterly OpEx.

Probability Map June 6

Meta Strategy Derivatives Portfolio – Probability Map Update.

Waning Momentum at Resistance

A massive bounce in the S&P was followed by a consolidation phase last week.

This is much more constructive than the immediate sell-offs we saw during the previous feeble rally attempts.

The area from 4150 to 4200 contains very strong resistance, as March and May bottoms were clustered here.

As most traders and investors expect imminent further lows, I think that a move above this level has a higher probability.

Probability Map May 30

Meta Strategy Derivatives Portfolio – Probability Map Update.

Constructive Bottom

Despite some whipsaws, the S&P 500 managed to stop its downward cascade with a classic bear trap and closed the week significantly higher to form what could be a solid intermediate bottom.

By now, a majority of investors has become convinced that we are at the mere beginning of a long, recessionary bear market period.

What better time to start a strong rally to make everyone doubt their newfound bearish conviction?

Probability Map May 23

Meta Strategy Derivatives Portfolio – Probability Map Update.

Whipsaw Market

Last week’s wild price action was a case in point for the wisdom of using a systematic “easy versus difficult“ market filter.

Difficult markets are filled with traps, whipsaws, failed setups, and so on.

The Monday after a crash into monthly OpEx has a very decent probability to form a short-term bottom, as options positions that exacerbated the downward spiral have now expired.

However, the demand in the current environment is not reliable, and the chance for failure remains high.

Probability Map May 16

Meta Strategy Derivatives Portfolio – Probability Map Update.

Market Playbook Reassessment and Lessons Learned

The S&P 500 has broken through key support and simultaneously the Meta Strategy model’s stop loss was triggered.

The trajectory of the real economy will now define the course of the stock market.

So far, nearly all of my model’s leading economic indicators remain solidly green.

Will inflation, the FED rate hike cycle, geopolitical trouble, China’s supply chain chaos, and so on topple economic growth or will the economy prove to be resilient?

This will determine whether we are in a non-recessionary bear market (or correction) that tends to be shallow and short, or whether we will tip into a recession, when bear markets are usually long and deep.

I also pose the question: What type of trader am I, and how can I use this insight to improve?

Probability Map May 9

Meta Strategy Derivatives Portfolio – Probability Map Update.

— May 10 Update: Position Alert —

Data Deterioration

The anticipated vol-crush rally around last week’s FOMC meeting came out of the gate strong, but failed to see any follow-through.

While we may still be looking at a potential double bottom, this was not the productive price action I would have liked to see.

An increasingly bleak picture is painted by current market studies, as well as the systematic warning signals in my market model, and I see a rising chance of an unravel into May OpEx once the S&P closes below 4100.

Probability Map May 2

Meta Strategy Derivatives Portfolio – Probability Map Update.

— Update Wednesday —

Teetering on the Edge

After a strong bounce during the middle of last week, stocks gave back all of their gains on Friday to end the month right at this year’s low.

This cliff edge around 4100 for the S&P500 has served as support multiple times this year, and traders are eyeing the abyss below with some of the worst sentiment expectations in 30 years.

This week’s FOMC turnaround setup is the last chance to save stocks from falling to the next level down, and it has a decent chance to succeed.

Probability Map April 25

Meta Strategy Derivatives Portfolio – Probability Map Update.

Buying Opportunity or Unravel?

Last Thursday’s to Friday’s mini-crash, which was caused by an increasing barrage of FED hawkishness, has revealed cracks in our positive setup.

We are back at a junction that we last faced in February: Is this the buyable washout that routinely scares weak hands out of the market after a correction bottom, or is it the beginning of a deeper decline — much like we saw at the end of 2018?

Because FED policy looks to be the main culprit for recent market weakness, I fall back to a time-tested setup for my actual positioning in a difficult market environment.

Probability Map April 18

Meta Strategy Derivatives Portfolio – Probability Map Update.

Choppy OpEx Week

The holiday-shortened trading week displayed a typical OpEx pin to a key support area.

The majority of market studies point to a high likelihood that this dip will resolve higher after building a higher low.

This is also part of a typical correction pattern: a deep scare-out after the initial rally from a correction bottom.

Despite some deterioration in market breadth, the overall picture remains constructive.

Probability Map April 11

Meta Strategy Derivatives Portfolio – Probability Map Update.

Spring Break

Many people are taking a break around Easter, and this gives the market a good opportunity to quietly put in a higher low as the highest probability scenario in the current environment.

Despite the many doom and gloom predictions, there will still be plenty of time to adjust our positioning in case of an incoming recession.

Meanwhile, there is a confluence of positive market studies, favorable seasonality, and easing geopolitical tensions, and it is time to be long over the next couple of weeks.

Probability Map April 4

Meta Strategy Derivatives Portfolio – Probability Map Update.

April is no one’s fool

There is a confluence of positive market studies, favorable seasonality, and easing geopolitical tensions, and it is time to start scaling into long positions.

Probability Map March 28

Meta Strategy Derivatives Portfolio – Probability Map Update.

The constructive picture continues with many new studies supporting the scenario of a new bull market leg in April as being the most likely.

But, beware of rebalancing flows during the first days of the month — the current bond sell-off is highly unusual and will trigger stock-selling and bond-buying to bring institutional portfolio asset allocations back to target.