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The Fed is Making Trading Great Again

Mar 25, 2019

Weekly SP500 Implied Volatility increased 57% following Friday's sell-off to 16.89%. For the coming week, the option implied move is + / - 52 SPX points or a lower edge of 2748.63 and an upper edge of 2852.79. Moreover, our favored risk sentiment metric, VVIX (Volatility of VIX), was bid nearly 20% higher as pros rushed into VIX product pushing our warning Level of 100. The Market is not oversold and I am closely monitoring for propagation of weakness from the lowest resolution outward.

Just like last week, it is highly probable the edges of the expected moves are traded through in this catalyst-filled week. Most notably is the onslaught of Fedspeak, GDP, and a broader picture of the health of the Housing market.

Once again, as the quarter rushes to close out nearly up 12% in the SP500 we appear to be entering a Traders Regime like 4Q 2018, where volatility explodes higher with expanding trading ranges creating ample opportunity for nimble pros, and implied correlation squarely focuses us on Macro Factors. 12% is a great year for many investors and whether they heed the divergence the equity and bond markets (price rally and yield curve inversion) are signaling and rush for the exits is of great interest.

When weighing just a handful of risks, they exceed the opportunity for any type of longer duration trade with the Fed in full retreat from their tightening interest rate policy in 90 days (What spooked them? European Recession? Global Recession? Getting ahead of 2020?) -- In fact, a rate cut is increasing in probability this year.

Additionally, Financials (XLF) were rocked from being up 13% YTD to now only up 6% and falling below their Maginot Line of 26.50 -- without Financials, the SP500 will likely fail to recover ground to make new highs. Price support is waning with Corporate Share Repurchases entering their blackout period due to 1Q 2019 earnings season; moreover, in the face of an Earnings Recession from peak earnings growth in 2018, will buybacks continue to march forward in a slowing economy.

These are but a few themes worth monitoring as abundant, tradable opportunities once again emerge.

Just as we witnessed last week, our Levels, particularly at extremes on the actionable 30-minute and Daily (not shown) frequency when coupled with intelligent order flow dynamics provide uncanny high probability set-ups.

Have a great week.

All the best,

Scott

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