Hi Everyone,

I have been asked by many people whether or not we will have a year-end rally. This traditionally happens during the last six weeks or so of the year as well as the first few weeks at the beginning of the year. Since everything has been different over the past few months, one could kind of doubt that we will have one. I don’t have a crystal ball either, but let me list some facts and you can decide for yourself:

• The CBOE Volatility Index (VIX) is still at astronomical heights. As I write this, the value is at 69.  Before September 12th, the value was around 25.  During the past 2 months it spiked above 90. The year to date low is about 15. During the 4 years prior to the meltdown, 23 was the high. Unless we see a decrease in volatility, there is not going to be a rally lasting more than a few days.
• All the rallies usually fizzle after a few days, sometimes after one day already. The rallies are mainly short-coverings and people selling into the rally. As long as we don’t see something more sustained, it will not happen. The down days also need to be smaller than the up days.
• One of the big question is if all the bad news is already priced into the market. If that is the case, some even modestly good news could potentially change the psychology of the market. Otherwise people will keep sitting on their cash.

We have been testing the lows set in October a few times, but always rallied right after wards just to come back to them. I think it would be best if we stay in that trading range.  I believe a major rally to let’s say over 10,000 on the Dow can not be sustained currently and likely will cause further drops, likely past the lows set in October. If we do go through the lows set last month, we will likely drop another 10% at least. On the other hand, I can see that the current lows could hold if we don’t rally. I personally would not bet on a year-end rally.

For all your traders out there, on the surface it looks like a great time to make money, as long as the timing is right. The extremely high VIX has been punishing for many option traders.

Please feel free to share your thoughts.

Cheers,

Patrick