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.

Probability Map March 21

Meta Strategy Derivatives Portfolio – Probability Map Update.

Looking for a Higher Low

A strong and constructive rally last week has a high chance of marking a decisive turning point in the current correction through a powerful breadth thrust.

The most healthy scenario going forward would be that the stock market puts in a higher low retesting a recent breakout area.

Short squeeze dynamics should now fade away and enable a pullback to a higher low supported by genuine demand.

Probability Map March 14

Meta Strategy Derivatives Portfolio – Probability Map Update.

Bull / Bear Watershed

For the first time in a long while, we are facing a watershed moment, teetering at the edge of a regime change from a Bull Market to a Bear Market.

Looking out over the next week, the most likely time for stock markets to fall apart is now, as option-based tailwinds for the S&P are fading.

Virtually all weeks going into monthly OpEx have shown very weak returns over the last year, and the big quarterly March expiration has often marked a decisive market extreme in the past.

It is time for me to move to the sidelines and wait for the next opportunity after OpEx week has passed.

Probability Map March 7

Meta Strategy Derivatives Portfolio – Probability Map Update.

— Updated targets tables Wednesday —

— Update Monday: Target for position reduction adjusted for market open —

Risk-Off Dominates

While the S&P 500 showed strong resilience last week, risk-off behavior continues to dominate across assets.

All asset classes are now pricing in highly uncertain knock-on effects of the worsening conflict and stricter-than-expected sanctions against Russia for the world financial system, energy markets and agricultural commodities. In oil, wheat, gold, bonds, European equities, and others this has already led to large panic spikes, which could exacerbate problems down the line.

It is an overall perilous situation, but because major shifts are already anticipated by investors my expectation is to see short-term mean-reversion from current price extremes (falling oil, wheat, etc. and rising stocks), followed by more volatility as the trajectory and unexpected consequences of how these shifts actually play out become clearer over time.

Probability Map February 28

Meta Strategy Derivatives Portfolio – Probability Map Update.

Invasion Bottom

Any big event that is perceived to carry large risks, paired with high uncertainty about the outcome, also presents a great opportunity, which unfolds in patterns that are often quite predictable.

With defined maximum risk, I don’t consider it reckless to buy into a panic spike to the downside, while allowing for a flexible price path that is driven by randomly unfolding events.

For the coming week or two a positive feedback loop provides structural market support, as falling volatility and passing time push the market up into a large quarterly OpEx in March.

The biggest window for potential weakness will begin mid-March going into an OpEx week and a major FOMC meeting.

We are likely to see strong setbacks on the way up.

Probability Map February 21

Meta Strategy Derivatives Portfolio – Probability Map Update.

— Thursday Update —

Peak FED — Peak Inflation — Peak Geopolitics

The stock market doesn’t really care anymore. These negative factors have largely been disseminated by the volatile market action since the beginning of the year.

In the meantime, dark pool data shows aggressive smart-money buying activity.

All of this speaks to the distinct possibility that stocks are currently building a second, final bottom in this correction. While peak volume, fear and capitulation were visible in late January, the market is now digesting the remaining geopolitical and central bank policy uncertainty much more quietly.

Should Russia invade Ukraine we may still see a final panic spike to the downside over the very short-term. But I would expect this to reverse very quickly and be a great buying opportunity.

Probability Map February 14

Meta Strategy Derivatives Portfolio – Probability Map Update.

— Thursday Positioning Update —

Correction or Worse?

Triggered by fears of an extremely hawkish FED pivot after a surprisingly high US inflation number, followed by heightened Russia / Ukraine tensions, the way has now opened up for the low retest our model portfolio is positioned for.

The big question, however, is: What comes next?

Precisely because they are so extremely emotional, strong corrections are exceptional opportunities for long positions during a bull market, but buying into a crashing market is difficult and dangerous.

My main scenario is a volatile bottom followed by a strong market recovery.

Probability Map February 7

Meta Strategy Derivatives Portfolio – Probability Map Update.

I usually don’t lend much weight to any one technical chart pattern, but the emotional rollercoaster ride of a sudden correction is an exception.

The market’s turning point last week was anticipated by the correction pattern setup with an uncommon level of accuracy.

But now the S&P 500 is stuck in the middle between strong support and overhead resistance.

At the same time additional market data is largely supportive over the long term, but probabilities are all over the place over the short term.

Probability Map January 31

Meta Strategy Derivatives Portfolio – Probability Map Update.

Wednesday Update — Preview of next week’s market outlook

— Tuesday Update —

Volatility Clusters

Even when expected, a lightning quick change in market regimes still always surprises, and it takes some time to adjust to a new environment.

Last week’s bout of volatility has forced the VIX futures term structure to invert over several days, which is one of my key indications that a significant change in the market environment has taken place.

In combination with the pronounced characteristic of financial markets to display a clustering of volatility, my expectation is that larger market swings are here to stay for the foreseeable future.

Probability Map January 24

Meta Strategy Derivatives Portfolio – Probability Map Update.

Tuesday Update

Where is the Bottom?

That is the question that everyone who actively trades equities is currently asking. The unfortunate answer is:

Nobody knows!

The good news is that getting the big picture right is more than sufficient, and there is no need to pick an exact low.

I analyze a variety of structural and technical patterns in today’s report to get to the bottom of the current market:

OpEx Unravel
Vol-Crush Rally Setup
Sell-off indicators and sentiment extremes
Correction pattern systematic trade setup
and more…

Probability Map January 17

Meta Strategy Derivatives Portfolio – Probability Map Update.

Update Wednesday pre-market

Why is it different this time?

The wide-range day last Monday spurred a short-term bounce, which I used to switch my trading portfolio exposure from long to short.

Until we have moved past OpEx next Friday, I will remain cautious before buying into weakness.

Several things are different from previous pullbacks with immediate relief rallies, and an unravel, though not necessarily expected, would be most likely to begin now.

Probability Map January 10

Meta Strategy Derivatives Portfolio – Probability Map Update.

Tuesday Update — New Trade Setup

News drives price against flows

A flurry of positive studies and signals just before the release of the FOMC minutes last Wednesday, which shocked the market into a pullback, leads me to regard this as a temporary, news-driven price decline.

But the upward potential looks to be capped as well, and short-term momentum is losing its drive as each new high is being sold off more quickly than before.

We may be witnessing a transition into a choppy sideways market phase (positive and negative influences are in a tug-of-war) that can easily lead to a deeper correction in the coming months.

Probability Map January 3

Meta Strategy Derivatives Portfolio – Probability Map Update.

Seasonality

As suspected, the traditional Santa Claus Rally had largely been front-run a few days earlier — nonetheless a juicy performance last Monday was sufficient to keep the positive return pattern over the period intact for now.

That flexible market participants pull forward widely expected returns is no wonder, considering just how much publicity this statistical phenomenon gets every single year!

Seasonality is best compared to a natural ebb and flow of the stock market over the calendar year, which causes a background current.

The way of least resistance is along broadly defined directional flows, but specific circumstances can easily overwhelm this soft drift.

As seasonal tendencies were an excellent guide throughout 2021, I continue to trust that ominous news (Omicron, FED tightening, etc.) are still weaker than the positive drift into mid-January.

After that we may be due for a bit of spring cleaning!

I wish you all the best and an excellent new Trading Year!

Probability Map December 27

Meta Strategy Derivatives Portfolio – Probability Map Update.

Santa’s Fake-out

For several days, it looked like Santa was planning to stay away from the stock market this year, but then the year-end rally took off with a vengeance late last Monday.

This caught many market participants, who had already written off the current positive seasonality, by surprise.

The size of this rally may have front-run the majority of year-end gains already, but the thinly traded holiday week is traditionally skewed towards positive returns.

Barring price-moving news the natural course is up, albeit at a more sustainable pace.

As usual, I map my current data-driven estimates of the probabilities for future returns of the S&P 500 over the short, medium, and long term.

Probability Map December 20

Meta Strategy Derivatives Portfolio – Probability Map Update.

Choppy Waters

OpEx week, which is often erratic, was particularly choppy this time around.

To me, the main culprits are two divergent forces that drove prices in opposite directions: yet another Vol-Crush Rally after the FOMC announcement and the pronounced tendency throughout 2021 to sell off into monthly options expirations.

However, with a new all-time high, many professional investors are now forced to dress-up their books for the year-end.

The most “natural” way this expresses itself is through a slow and steady grind-up of the stock market.

As usual, I map my current data-driven estimates of the probabilities for future returns of the S&P 500 over the short, medium, and long term.

Probability Map December 13

Meta Strategy Derivatives Portfolio – Probability Map Update.

Thrusts, Thrusts, Thrusts

In a déjà-vu of late October, up-thrust signals triggered across the board last week.

It seems to have become typical for the current environment to see such swings from risk-off to risk-on — and back again — in a short period of time.

In conjunction with deterioration in long-term market breadth and the looming specter of liquidity withdrawal, these jitters look to me to be symptomatic for the beginning of a prolonged regime change.

As usual, I map my current data-driven estimates of the probabilities for future returns of the S&P 500 over the short, medium, and long term.

Probability Map December 6

Meta Strategy Derivatives Portfolio – Probability Map Update.

— Tuesday update: adjusted position sizes —

Markets at Crossroads

Last week’s whipsaws were mainly caused by FED Chair Powell’s hawkish comments, which went contrary to widespread expectations that increased coronavirus concerns would lead to a softening of the FED’s tightening rhetoric.

The increased indecisiveness and fragility of the market is visible in a plethora of new studies that show that risks for a downward spiral have increased. But currently we are still holding above key support levels, and volatility may just as easily express itself to the upside.

As usual, I map my current data-driven estimates of the probabilities for future returns of the S&P 500 over the short, medium, and long term.

Probability Map November 29

Meta Strategy Derivatives Portfolio – Probability Map Update.

— Thursday update: New trade setup levels —

— Wednesday update: New trading setup active —

Liquidity Panic

A sharp sell-off during the low-liquidity environment of Black Friday led to one of the sharpest VIX spikes in history.

Analyzing the catalysts, I come to the conclusion that we may soon see a post-panic volatility crush that sets up a year-end rally.

As usual, I map my current data-driven estimates of the probabilities for future returns of the S&P 500 over the short, medium, and long term.

Probability Map November 22

Meta Strategy Derivatives Portfolio – Probability Map Update.

— Tuesday Update: New Gamma Dip levels for long re-entry —

Clouds in the Sky

Last week’s seesaw price action in the S&P caused some unhealthy divergences underneath the market’s surface, however an uncommonly large options expiration last Friday may provide an alternative explanation to these issues.

We might just be seeing a mechanical consequence of a gamma pin during the options expiration cycle that looks like an extremely worrisome divergence, but that was actually resolved by the expiration on Friday.

Now the way is open for a larger price move in either direction, and I analyze the main factors that influence whether we go up or down.

As usual, I map my current data-driven estimates of the probabilities for future returns of the S&P 500 over the short, medium, and long term.

Probability Map November 15

Meta Strategy Derivatives Portfolio – Probability Map Update.

Rally Dynamic

I still expect positive returns through year-end into the beginning of 2022.

In fact, chances are high that we are seeing an accelerated blow-off rally dynamic developing right now.

My current orientation is based on a detailed technical picture paired with the price action we will see this week and a backdrop of quantitative market studies.

As usual, I map my current data-driven estimates of the probabilities for future returns of the S&P 500 over the short, medium, and long term.

Probability Map November 8

Meta Strategy Derivatives Portfolio – Probability Map Update.

— Thursday Update: New Gamma Dip levels for long re-entry —

— Wednesday Update: New Gamma Dip levels for long re-entry —

Breakouts Galore

The Nasdaq followed the S&P 500 to new highs; small caps broke out after 9 months of consolidation; and European stocks broke out after 6 months: all of these indices closed the week at fresh all-time highs.

There is a strong feeling of “this is too much, in too short a time — it can’t possibly continue” in the air, and I take a close look at whether the data supports that intuition.

As usual, I map my current data-driven estimates of the probabilities for future returns of the S&P 500 over the short, medium, and long term.

Probability Map October 25

Meta Strategy Derivatives Portfolio – Probability Map Update.

— Wednesday Update —

The scenario of a grind higher into the year-end has become the likeliest by far, which makes the difficult art of sitting tight and doing very little the best course of action.

These time periods, when trading and investing positions are aligned, have the potential to propel our portfolio up significantly.

As usual, I map my current data-driven estimates of the probabilities for future returns of the S&P 500 over the short, medium, and long term.

Probability Map October 18

Meta Strategy Derivatives Portfolio – Probability Map Update.

In week six of the first significant consolidation period since September 2020, the S&P 500 has reclaimed key resistance areas to close right at the last hurdle before its all-time high.

I look at the main scenarios of what the near future (1-4 months) may look like and how to best structure our current positioning to balance the odds for a high probability of success paired with the possibility of a high payout.

As usual, I map my current data-driven estimates of the probabilities for future returns of the S&P 500 over the short, medium, and long term.

Probability Map October 11

Meta Strategy Derivatives Portfolio – Probability Map Update.

— Friday Update —

We are entering one of those rare periods, when all quantitative studies start to align with the basic tendency for stock prices to go up.

A 5-week consolidation has flushed out the negative indications that have persisted throughout the entire year, while the news provides a plethora of worries for the market to overcome.

A perfect setup for positive returns over 2 – 6 months.

Mr. Market may take issue with this simple view, and the current consolidation period can easily stretch on for longer, or flush out weak buyers with vicious price drops to new lows.

As usual, I map my current data-driven estimates of the probabilities for future returns of the S&P 500 over the short, medium, and long term.

Probability Map October 4

Meta Strategy Derivatives Portfolio – Probability Map Update.

We successfully navigated the market’s rollercoaster ride of the last two weeks using systematic trade setups and specific market structures.

Now, I anticipate a volatile market bottom that presents a great medium-term opportunity on the long side.

As usual, I map my current data-driven estimates of the probabilities for future returns of the S&P 500 over the short, medium, and long term.

Probability Map September 27

Meta Strategy Derivatives Portfolio – Probability Map Update.

— Thursday Update —

The expected volatility expansion (in both directions) after the September options expiration played out neatly around a highly anticipated (and feared) FOMC meeting.

I provide a detailed analysis of “The Post-Event Vol Crush” trade setup, which I consider to be one of the most promising edges in today’s options driven market.

As usual, I map my current data-driven estimates of the probabilities for future returns of the S&P 500 over the short, medium, and long term.

Probability Map September 20

Meta Strategy Derivatives Portfolio – Probability Map Update.

— Tuesday Update —
— Monday Morning Update with additional post-FOMC volatility event assessment. —

The current pullback looks quite different compared to the last V-bottom drawdowns in the S&P.

After a big options expiration date, the way is open for faster, larger moves. Extremely negative seasonality supports the case for a volatile down-market next week.

The movement in the stock market has led to a lot of interesting new data points from many different angles, which overwhelmingly point to the same conclusion: A volatile 2 – 4 week period is likely to be followed by strength into year end.

As usual, I map my current data-driven estimates of the probabilities for future returns of the S&P 500 over the short, medium, and long term.

Probability Map September 13

Meta Strategy Derivatives Portfolio – Probability Map Update.

Last week, we saw the stock market slowly deteriorate before the monthly “window of potential weakness”, which centers on options expiration.

The current level is where, in recent months, the pavlovian reaction of dip buyers would have kicked in: This has resulted in increasingly shallow drawdowns.

I remain skeptical that this simple tactic will continue to pay off.

As usual, I map my current data-driven estimates of the probabilities for future returns of the S&P 500 over the short, medium, and long term.