Options Markets Muting Signals

Now that the options markets are the tails that wags the dog, equity market signals are losing power.  Or at least temporarily losing efficacy.  It doesn’t feel like a permanent arbitraging away, but huge capital (regardless of source) knows how to use broker dealers and market makers to maintain a supportive stance for respective portfolios.

I’ve been analyzing plenty of signals that a trap door is set up just under the stock markets.  Amongst those signals is the clustering of Hindenburg Omens in the NASDAQ.  A single Omen rarely proves useful, but clusters have been consistently effective in communicating large sell-offs ahead of time.  Observe the following chart, courtesy of The Felder Report:

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Just based on the chart, one would think that a large drawdown is very close.  In the past couple of decades, any time we’ve seen clusters of the Omens in a single calendar year reach 13 or more, then it usually was a portent for a heavy risk-off period.

Subsequent to November’s OpEx, if large capital simply continues to allocate to higher strikes farther out on the calendar for the major indexes, then the signal the cluster is communicating could be totally dampened.

It simply hasn’t paid to be the least bit bearish, but it feels like we’re drawing closer and closer to a period in the markets where fear and option flows could feasibly create a perfect multi-year set-up for expert surfers of price action.

Looking out 10 years, my gut tells me that there are fair odds that markets won’t experience a single, long drawdown similar to the Tech Crash or the Great Financial Crisis.  Instead, we’ll experience rolling drawdowns (15% to 35%) through the 2020’s but with an overall upward tilt on a long-term price chart.

It’s just a theory.  The Final Arbiter will reveal its hand in time, but you might want to consider waxing up your board and getting a new wetsuit for the potential environment ahead this decade.

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