Low Market Volatility Makes It Difficult to Make Huge Gains

With the exception of grains and other agricultural commodities, low volatility has been a common characteristic of markets–ranging from currencies to stocks to bonds to metals–since the beginning of the year. Vix, which is a measure of market expectations of volatility of the S&P 500, is currently trading close to an all-time low.

A very low Vix level, which is measured by option premiums on both calls and puts, is a major reason it has been tough to make money trading markets, and nearly impossible to make big money. Because markets are interrelated (with the possible exception of foodstuffs), low volatility in the big daddy S&P market usually goes hand in hand with low volatility in other markets as well.

This low volatility shows up in our indicators, where, with only one exception, no market is flashing deep red or bright green. Thus, despite our promise of offering more trades, the market has not been cooperative. Still we are moderately pleased to have closed out two winning trades this past week and since the beginning of May, 5 out of 5, winning indicator-based trades.

Since the beginning of 2016 the last two winners has notched up our longer-term winning percentage for indicator-based option trades to 80 percent and for catching the right direction of the underlying ETF to 90 percent. As we have said before these percentages place us in the six-sigma club, which is something to brag about but absolutely no reason to get complacent. We have just started adding Chinese metrics to some of our indicators. One stumbling block is that many Chinese markets have been tightly controlled until very recently – the last year or two. This has made it difficult but not impossible to find Chinese variables that improve our indicators.

Bad news is that the average gain of the most recent five – a bit under 10 percent – is well below our longer-term average. Moreover, after commissions, it is doubtful that any of you is ready to take us out to lunch. Which again leads us back to futures. While futures can be a much more dangerous game than naked calls and puts, where losses are always limited to what you invest, in unhedged futures trading an out-of-the blue event in conjunction with a highly leveraged position can theoretically lead to losses greater than your investment. Still the advantages are that if you do get the direction right you are going to make money. Even in the case of the recent close-out of the SPY option that netted less than 1 percent on the option on a gain in the ETF of a miniscule 0.1 percent could have generated 3 percent on a futures trade after all costs – still nothing to write home about, but not bad for a week’s work.

Summing up for now we are sticking with options and do promise to do our best to give you more trades. But we do need some cooperation from the market. A sudden change in an important economic vector would probably do the trick. And on this score, as we have been saying in our updates, our bet is a sharp change in oil, but whether it be oil, currencies, or bonds, it will give us a good chance to increase your returns.

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Here are the current readings: stocks, -1; dollar, 0; gold, 0; gold stocks, 0; oil, -1; oil stocks, -2 (but improving); bonds, +1 (but declining), silver, 0; base metals (a new addition), 0.

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