Here is exactly what's going on in the markets:
- Forget the clowns in Washington. There is a massive RISK OFF trade going on where elite hedge funds and large bank prop desks are liquidating pretty much every risky asset, heading into gold, silver, US Treasuries, and going long volatility, profiting off market fear.
- At the close, the VIX, a gauge of market fear, surged 46% on Monday. Hedge funds and bank prop desks are making a killing on the VXX and TVIX.
- I am now short volatility, long the XIV, believing that things are getting out of whack again. I got long XIV this morning around 10:30 but should have waited until Obama addressed the nation. It's foolproof, every time he addresses the nation, the stock market tanks right after. I also noticed the volume on the FAS surged today as traders are betting that the correction in financials is overdone.
- One Montreal hedge fund manager shared these thoughts with me: "Just to let you know XIV does not perform best in times of backward VIX term structure. Buying XIV now, is like selling the one month forward VIX at 30, while the cash VIX is above 38 (as I write), giving you strong headwinds. We have modeled inside out these relationships. At this moment you would be better off to buy VXX and buy the S&P, allowing you to profit from the favourable term structure."
- But the amount of forced liquidation in small and mid cap stocks going on right now is unprecedented. Hedge funds facing redemptions are shoring up their cash levels and selling every long position indiscriminately.
These stocks are way, WAY OVERSOLD, getting more oversold by the second, and it's all hedge funds liquidating. That's it, that's all, has nothing to do with fundamentals.
And for all you wusses who don't believe in buying sub $5 stocks when fear reigns, let me show you one of my favorite charts (click on image to enlarge):
Las Vegas Sands (LVS) hit a low of $2.27 on March 9, 2009 and its 52-week high was $55. It has recently sold off, but my point is that some stocks swing wildly because hedge funds are playing them on the long and short side. That's the reality of Casino Capitalism and this Wolf Market dominated by algorithmic multi-million computers engaging in high frequency trading.
That is what is going on folks, nothing else but hedge fund punks making a killing, trying to score the "Big One" so they can retire early while the rest of the hard working population is watching their 401 K plans shrink at a frightening rate. They'll never be able to retire in security or with dignity.
I repeat what I stated: this market is way oversold but could get even more oversold. Pension funds with deep pockets better be buying risk assets now. Retail investors should sit tight and let the silliness play out.
Let the hedge fund punks trade away. I think the selling is way overdone. Everyone needs to take a deep breath. Who knows? Perhaps August 9th 2011 will be another major market low, similar to March 9th 2009. At the very least, we are due for a major short-covering rally.