I Told You Last Weekend This Was Coming

Last weekend I told you the market was coiled and ready to explode on volatility. 

Today it started.

I do not say that to take a victory lap. I say it because the signal that called it is one you can learn to read, and it is still flashing. 

Here is what it was.

For weeks the market climbed while the VIX refused to come down the way it normally does. 

When stocks rise, fear is supposed to drain out and volatility falls. That relationship broke. 

Volatility stayed stubbornly bid the entire way up, which told me the options market was quietly pricing in trouble the rally was ignoring. I called that coil last weekend, I reiterated it Wednesday night, and today the spring let go.

On Wednesday I pointed out that the volatility for Monday's expiration was sitting near 9.77%, about as low as it gets. 

I said there was only one direction it could go. It went up today, exactly as you would expect.

But here is the part I want you to sit with, because it is the real lesson. Even after today, the entire coming week is only pricing in about a 170-point move in the S&P. 

We just traveled 200 points in a single session. 

The math does not reconcile. The market is telling you it does not believe it can keep moving like this, and that gap between what just happened and what is priced is where the next opportunity lives.

That is the whole point of the expected move. 

It is not a prediction. It is the market showing you its own hand, and right now its hand and reality do not match.

To your success, 

Don Kaufman