• 1 - How to Stop the Downturn - New York Times

  Stiglitz on the economy - absolute must-read

  (tags: mortgage stiglitz bush us taxes markets economy)

Today saw an almost 600 point swing in the Dow, which closed up 299 points.  Breadth and volume indicators confirmed today’s reversal, the VIX dropped back to 28, and models started getting paid in US dollars again (not really).

The one downer today was the NDX.  Although the Nasdaq didn’t close green, the index almost completely closed the gap between yesterday’s close and this morning’s open, and obviously would’ve pulled much higher if not for Apple’s earnings disappointment. AAPL was off 10% today, closing at levels not seen since last October.  GOOG was down over 6% today, probably due to nervousness over upcoming earnings.

Needless to say, we now have a slightly larger cushion in our February DIA trade, which is now trading for exactly the price at which we entered. We will continue to monitor our open position and to look for appropriate opportunities for March positions. If the markets can stabilize here and then move a bit higher, we may be able to hold our February trade through a longer cycle.

But note that one day’s rally doesn’t change anything.  This is a short-term bounce, not a change of trend, and we expect to visit yesterday’s lows again in the coming weeks or months.

• 1 - The Big Picture | Open Thread: Bill Gross Quote

  It’s a sad testament to think the Fed has to cut interest rates eight days in front of a meeting to salvage the equity markets. The U.S. economy is in a rather sad state of affairs in that it depends on housing and stock prices to keep going. -Bill Gross

  (tags: pimco bearish markets)

• 2 - Bespoke Investment Group: Large Down Gaps in SPY

  Below we highlight the largest down gaps in the S&P 500 tracking SPY ETF since 1994. As shown, when gapping down 2.5% or more, the ETF has traded higher 8 out of 9 times for an average gain of 2.69%.

  (tags: bearish bullish markets)

• 3 - TraderFeed: Historic Five-Day Declines in U.S. Stocks: What Happens Next

  To give an idea of how rare it is for stocks to drop more than 10% in a five-day period, we’ve only had 11 such instances since 1960. On 10 of those 11 occasions, the S&P 500 Index was higher 10 days later by a very large average of 5.62%.

  (tags: bullish bearish markets)

• 4 - High Probability Trading: -31k, Goodbye

  Why we’re always preaching asset allocation: “Good Bye………I hope you all have a nice life. I need to be to work in 2 hours, and I can’t manage this position, I have to sell out. About 40k in 2 days,,,,,,,,,,,,gone. Speechless. One bad trade, is all i

  (tags: bearish trading futures allocation asset)

• 5 - VIX and More: Brunhilde Day Today?

  Today could turn out to be one of those days that imprints the value of the VIX deeply into the psyche of many traders.

  (tags: volatility vix)

• 6 - A Painful History - ChronicleReview.com

  “As today’s debates about waterboarding and the like make clear, torture can deeply divide a society. It is past time for Americans to start building a democracy without torture.”

  (tags: democracy us torture)

• 7 - Information Arbitrage: Who REALLY Benefits from Volatility

  There is going to be a lot of money made in the next 12-18 months by a precious few, at precisely the time when most are getting brutally hammered. Long live volatility! If you can take advantage of it…

  (tags: value berkshire insurance bond mortgage volatility)

There’s an AP article out today titled, “Wall Street Braces for More Volatility“. The subtitle is: “This Week Brings Wall Street More Earnings, but It Could Be Months Before Volatility Subsides.” Given that it’s the Associated Press, it’s not fair to expect any sparkling VIX or options commentary, but still, it’s weird that the word “volatility” doesn’t appear in the body of the article - only in those titles. Rather, the rest of the piece is about the recent selling, the possibility of bad earnings over the coming weeks, and recession.

But what do any of those macroeconomic stories have to do with volatility? Well, nothing, necessarily. People seem to be equating “volatility” with “selling”. But that’s not quite right. Volatility is:

1. A statistical measure of the dispersion of returns for a given security or market index. Volatility can either be measured by using the standard deviation or variance between returns from that same security or market index. Commonly, the higher the volatility, the riskier the security.
…In other words, volatility refers to the amount of uncertainty or risk about the size of changes in a security’s value. A higher volatility means that a security’s value can potentially be spread out over a larger range of values. This means that the price of the security can change dramatically over a short time period in either direction. A lower volatility means that a security’s value does not fluctuate dramatically, but changes in value at a steady pace over a period of time. [Investopedia]

So when an underlying stock or index goes straight up, it’s not volatile.  And when it goes straight down (like the major indexes have done so far this year), that’s not volatility.  That’s just selling.  On the general definition, you’ve got to actually have some movement in more than one direction before you can call it volatility.  Normally, any serious selling is accompanied by a VIX spike - that’s what forms this selling=volatility notion in people’s minds - and the reason for that VIX spike is typically increased put buying.  But if the VIX doesn’t rise and markets don’t bounce around (but instead just go straight up or down), there’s no relevant sense in which you can use the v-word.

• 1 - The Big Picture | 12 Investment Principles
  6. Take a base on balls, hit a single, but don’t go for the fences.
  (tags: principles trading investing)