Man, Friday was a bloodbath as mainstream financial media pushed narratives of an omicron-variant-induced market crash.
When a huge move like that happens, you can have a lot of different feelings…
But when you’ve been an analyst as long as I have, you don’t feel much at all. And that’s especially true when something other than fundamentals is driving the market.
How do I know that’s the case? We look at our tried-and-true method for whether markets are crashing.
The three Vs…
- Volume.
- Volatility.
- The volatility of volatility.
Well, volume certainly wasn’t driving it. No, in fact it was down 30% compared to Wednesday’s session, and 51% relative to the one-month average.
Source: Fortune Research
So if it wasn’t volume, was it volatility?
Source: Bloomberg
It wasn’t… The VIX spiked just above where it was around September options expiry, but failed completely and is now headed lower.
What about the second derivative — the volatility of volatility?
Source: Bloomberg
Again, no real breakout there… In fact, it started to slow down Monday.
When there’s a collapse in pricing that isn’t also accompanied by breakouts in volume, volatility and the volatility of volatility, then buying the dip — and covering any shorts — works out well 75% to 80% of the time.
That’s because those fake freakouts are driven by narratives and algorithms, not by numbers.
Truth of the Omicron Variant ‘Market Crash’
Friday’s freakout — not a market crash — was based on a “super scary” new variant of the coronavirus dubbed omicron that has apparently come to dominate new cases in South Africa.
Early indications seem to suggest that the omicron variant is more transmissible. However, it’s still a small number of cases relative to prior outbreaks.
Source: Bloomberg
But given that deaths have not appreciated meaningfully since the variant was discovered…
Source: Bloomberg
It suggests in turn that while omicron may be more transmissible, it may also be less severe. And if that’s indeed the case, then Friday’s selloff was an absolute gift.
For our watchlist, the right play would have been to sell natural gas on Friday’s rip to buy coal and oil.
And the right play Monday was to do exactly the opposite.
Source: Bloomberg
Natural gas prices have solid support at both the $4.75 level and down near previous cycle highs at $4.20.
Source: Bloomberg
Keep in mind that temperatures are getting colder. Gas is already being diverted to residences for heat, and stockpiles for its backup fuel (coal) are at all-time lows… and getting worse.
Source: Bloomberg
Until that dynamic changes or March arrives — whichever comes first — the United States Natural Gas Fund (NYSEArca: UNG) and Consol Energy Inc. (NYSE: CEIX) will be on the watchlist.
And with gas down almost 10% Monday morning, it was a great day for a FREE TRADE.
Maybe a small — tenth of a position or less — in UNG? What do you think?
There’s a chance it may continue to correct lower, so keep plenty of dry powder — extra cash to invest — handy.
The exit strategy is simple… close out everything during the first big winter storm — and never look back.
But the remainder of the watchlist is starting to get into a tight spot. I’m not going to pass full judgement until we get past month-end — when hedge funds complete their rebalancing — but it’s beginning to look like the broader economy is slowing again.
If that’s the case, we go back to the summer playbook and shift from small caps into large caps, from high short interest to low short interest, and we stop shorting gold and bonds.
If economic data confirms that thesis — Monday’s massive home sales beat did NOT, by the way — you might see me front-run some of those changes.
So keep an eye on that inbox… I have a feeling this week is going to be interesting.
All the best,
Matt Warder
Fortune Research
P.S. Chuck Hughes wanted to prove the effectiveness of the Triple Threat blueprint with real traders just like us…
So he set them loose with a $50,000 stimulated brokerage to see what type of returns could be possible…
And just look at how some of his best performed in just three months.
