Why we were Buying Fear Monday near the Lows

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“EU Banks are in a world of Brexit pain, we are taking advantage of fear. EU financials are a screaming capitulations Buy today. Our 7 factor capitulation model is giving us a very strong buy reading, even stronger than the one we had in February. The Jo Cox tragedy created a false reality, last week investors piled into buy the Pound and EU banks, a classic student body left. This has created an amazing short term buying opportunity for the brave investor who appreciates risk / reward.”

The Bear Traps Report, June 27, 2016


One of the more prominent reasons we were buying equities into Monday’s plunge was the fact that in recent years, as markets become stressed, central bankers float new creative ideas into their favorite media channels. The net result is a consistent and fairly predictable student body left, student body right market movements.

VIX Futures 3

The steepness of the VIX futures curve is one of our 21 Lehman Systemic Risk indicators. The speed of the steepening process is a key element to risk management. In all market panics, the front month VIX future trade rich to the outer months. As you can see above, on Monday of this week the VIX futures curve was flat, move into slight backwardation. We used this as a signal to bet long equities (see our Bear Traps Trade alert from Monday, June 27).

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The CBOE Volatility Index is on pace for its biggest weekly decline in history as investor nerves settle following the U.K.’s decision to exit the European Union. Since the so-called S&P 500 fear gauge surged 49 percent last Friday, it’s slid in each of the last five days for a 42 percent decline in the period. The VIX is stabilizing after last week’s 33 percent increase, which was within the 97th percentile of gains for similar periods. – Bloomberg

VIX new 2On May 29th, we recommended clients get long volatility as complacent equity markets were not appreciating coming Brexit risk.

Lehman Memories

Over the last 10 days, the S&P 500 has moved 1.3% or more (up or down) 6 days in a row. Hasn’t hit 7 since Dec 2008.



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