NASDAQ futures closed at the highest levels since the October sell of started. NASDAQ is +20% year to date. The past weeks rally has started to produce the “chase what everybody else is doing” mentality according to us. Short term this has been the right thing to do, as prices have been continuing higher. The question is will this “chase” mentality continue to be the rational thing to do going forward.
NASDAQ is reaching big resistance levels that should be considered.
NASDAQ “VIX”, VXN, has imploded along the global volatility carnage, but we are reaching some sort of historic mean average levels here.
The rational thing to do has been to play the momentum and not overthink. Despite the hedge fund space having had a great first quarter, they are under performing the SPX massively. Sure, they are supposed to be focusing on absolute returns, but even these guys get stressed when they see how much better the average Joe is doing compared to their “complex” way of investing. Is the current rally starting “decoupling” from reality? If so, be sure to start looking at cheap ways to play the low volatility.
As Bloomberg writes on tech;
Profits are shrinking at an alarming pace; valuations are reflating and politicians want to break the companies up. Semiconductor orders have slumped, and spending on infrastructure to support the cloud is off. And yet the addiction won’t break. Shares are up more than 30 percent since Christmas.
Below chart shows the skew of the QQQ US. Orange is the skew today and green how it looked 3 months ago. We can clearly see how the entire vol level has shrinked, but do note also how cheap say 10% upside has become in terms of absolute levels.
The wild squeeze could continue. Who knows, maybe the underperforming hedge funds will throw in the towel and go all in, but that is impossible to know. The “rational” trade has so far been to chase the momentum, but given the fact we are reaching huge resistance levels soon, for most US indices, the rational thing to do is probably shifting.
We have been writing about cheap options exposure, cheap gamma, and those have been great ways to play market direction via cheap options. As volatilities have come off further, the case for using options going forward is getting even more “rational”.
Why not consider selling out cash longs and replacing with cheap upside calls if you want to continue the momentum chase long trade? That is a more rational thing to do than just stay “simple” long.
Source, charts by Bloomberg