It’s been a good run this year so far. The market is up over 17 percent as I write this post. Many traders would say that market conditions are not fundamentally much different than they were on January 1. But the market apparently is not aware of that fact. Most of the professional traders I’ve talked to are looking for a market pullback, if not a bonifide retracement.
But, do you know what these same bear market seeking traders are not doing? They are not getting short. That’s right. These smart money traders who believe the market is too high and should come down won’t touch a put with a 10-foot pole. Why? There is no bear market technical set up.
In order to properly craft a downside option trade, the bear market set up has to be there. Right now, we have an SPX chart that has no resistance to speak of. There are no lower lows. There are no signs of being strongly over extended with any indicator. There are no bear market patterns. Technically, there is no reason to sell.
Of course, that is not to say these traders are buying however. They are trading very cautiously, as if they are planning which block to remove from an already rickety Jenga tower.
This, I believe, is one of the reasons why we’re seeing such weird VIX trading lately. Typically VIX and SPX move in opposite directions. Or at least, 87 percent of the time they do, historically. But not lately. We’ve seen plenty of times over the past few weeks where as the market rises, so does the VIX. Why? I think it’s because when the market rises, the smart money doesn’t step in and put their money down on stocks. They instead buy limited-risk calls and keep the bulk of their cash in a protected money market account. One could look at a call as a hedge. Traders can hedge against missing out on a rally, while keeping most of their cash safe by buying a call instead of buying stock.
So, when is it time to get short? When will there be a REAL bear market? We’ll have to wait for the technicals to give us something to trade. IF, and when, that happens, it could be a doozie.