Weekly Update

May 22, 2017

Welcome to the Bollinger Band Letter Hotline for Monday the 22nd of May 2017.

 

Frontier has restored our connectivity and most things were back to normal as of this morning. It appears that a power surge was the culprit. The few things that are still lagging should be working as expected by tomorrow.

 

I have been in Japan for the best part of two weeks. Even though I had all the connectivity one might want, being in the countryside of the southern-most Japanese Island, Kyushu, lent some perspective to the markets. It can be quite useful to get up and walk away from the screen for a while, and it is especially useful to get away from the noise (news) these days. After just 10-days off the feed, you can instantly see how pervasive the madness has become when you pick it back up. A quick scan of the major news sites Monday morning revealed a paucity of news displayed against a ravening backdrop of sheer insanity. Never has the core rationale for technical analysis been so clear and the need to think independently and for one's self been so important.

 

Wednesday, the 17th of May, should have been a wake up call for all market participants. That day's price action was not market action in the usual sense, it was a volatility event. Have a close look at it and remember it carefully for it is a prototype for future events. It marks the completion of a crossover from the markets as we have known them to a new era where volatility is the name of the game not a description of a market characteristic. One way of seeing this is via the related ranges; the market fell by roughly two percent while the VIX surged by 40% and some VIX derivatives moved even more. The problem is that the tail is now wagging the dog. There is so much money committed to VIX futures, options, ETFs, ETNs, and, most importantly, volatility swaps, that even the smallest changes in the outlook for volatility are having out-sized impacts on the markets. It was Jim Yates that first hipped me to this idea, a couple of decades back when they first started trading long-term options, LEAPs. He pointed out that most investors would likely be disappointed in LEAPs as they misunderstood them. They thought that changes in prices would drive LEAPs prices, but in reality the largest impact of LEAPs price changes came from changes in volatility estimates.

 

I'll take volatility and its derivatives up at length in the next newsletter as it will be perhaps the most important topic in coming years. As with other market moving ideas, like program trading in its day, regulators could change the volatility landscape, but they show no signs of wanting to do so yet. I suspect that it'll take a real market debacle after which investors will demand their attention.

 

In any case, our market outlook remains positive and we are examining the recovery rally carefully for clues about the next leg.

 

There were no changes to the ETF portfolio either last week or this week.

 

Ice Breaker now has a single position for each of the five monitored ETFs.

 

Be careful out there!

 

The Value Line Plan is in the market with a Friday sell stop of 511.46.

 

The Value Line Geometric Index stands at 517.54.

 

The current allocations are:

70% US stocks, 10% International, 10% Yield and 10% Cash.

 

The ETF Program portfolio holdings:

Style (21): IUSG, 3, IWF, 2, IWB, 5.

Country (21): EWO, 1, EWP, 5, EWN, 2.

Sector (27): XLK, 3, IGV, 2, SOXX, 5.

 

Details on our Allocations, Ice Breaker and our ETF portfolios can always be found online:

https://www.bollingerbands.com/bb-letter/

 

Until next time, I wish you well.

 

John Bollinger, CFA, CMT

 

Copyright 2017 by Bollinger Capital Management

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