Crazy Ivan Turns On The Stock Market

The S&P 500 pulled a “Crazy Ivan” on the bulls this week, turning on them just like a Soviet submarine captain during the Cold War.

At the risk of sounding like a broken record: this is a completely normal behavior of the stock market.

So typical that this last year's run in stocks with very few pullback is the exception to the norm.

Now suddenly, with mean reversion back in that cards, everyone is freaking out.

It’s all over the news, blogs, and texts from clients and friends.

“It’s the end of the world!”

But again (and I’ll keep saying this till my retirement from investing) this is normal behavior.

The stock market is like your manic in-laws; you should expect the unexpected.

In fact, you can models this "normal behavior"; one of my personal automated day-trading systems picked up on the trend-day-down Friday:

stock market day trading system

It takes guts to trade the stock market

You have to be a buyer when the mania is at its peak.

You can’t wait for some indicator to start turning around, certain candlesticks to form or for the “all clear” to sound from the talking heads because you will miss out on a lot of profits.

If you are using anything that is a derivate of price – RSI, MACD, Stochastics, ADX, Over-bought, Over-sold indicators – none of that stuff works.

If you are using anything based on a derivative of price, there’s probably a better way can you figure out the market besides using that garbage.

Dumb money

There are two camps of money in the stock market, smart money, and dumb money.

The VIX is a good example of dumb money at work.

The VIX measures option premium and it was up on Friday, not to level seen back in 2008-2009, but that doesn’t matter, its all about percentage moves, not absolute moves.

Everything is relative when it comes to measuring the stock market:

Never listen to options traders, EVER!

VIX dumb money

So, are we out of the woods yet?

Well, the future is unknowable and mostly random.

But with the VIX at very high levels, sell volume at an extreme and the mean-reverting nature of the stock market working for us, there is a good probability of a reversal...

By how much and when?

Well, if someone actually answers that question with certainty, you should run the other way fast because you have a fortune teller on your hands.

I'll let you in on some statistics though.

From this level, there is an 80% chance of making a profit if you are a buyer of this dip...

How to trade the stock market

But, there's a little more going on besides just the VIX...

Did I buy the dip?

Enjoy the Super Bowl!

-Kurt

 

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About the Author

After 12 years as an electrical engineer, I'm proud to bring a scientific methodology to an industry full of unproven claims and bad advice. I LOVE BIG DATA!

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