Market view May 23, 2022
The markets seem oversold, ARK (with all their tech stocks from which their index is composed) has stopped going down, and bonds are now helping. Vol control strategies have been out since March 20 OPEX expiration and waiting to get back in.
Vol control strategies are investment strategies that attempt to control exposure to volatility by hedging or making use of derivatives. Institutional investors often use these strategies, such as hedge funds and pension funds.
Several different techniques can be used in vol control strategies. For example, a common approach is to buy put options – which gives the holder the right to sell a security at a specified price – when volatile markets.
That can help to protect against losses if prices fall. Another approach is to use derivatives such as options and futures to take advantage of price movements. That can be done by selling options when markets are expected to fall and buying options when markets are expected to rise. Vol control strategies can be used in several different asset classes, including equities, commodities, and currencies.
However, these tech stocks from ARKK have stopped going down, which could mean that the market could turn around. Additionally, bonds are beginning to stabilize, which is another sign that the market could be ready to rebound.
If there's more selling, that pressure will probably come from retail traders since they are typically more emotional and prone to selling when markets turn south.
Bitcoin Skew
The skew measures the difference in the implied volatility of put options and call options. A positive skew indicates that put options are more expensive than call options, while a negative skew indicates the reverse.
The skew reached -20 vol points on May 12th, suggesting that investors were willing to pay a premium for put options. That indicates that many people were capitulating, and the market may be due for a bounce. The 1-week skew is now at -5.8 today, which is still negative but less than on May 12th. That suggests that the market has indeed bounced, and the fear that drove people to buy put options has diminished somewhat.
It's difficult to predict where the market will bottom out, as there could still be more downside. In the summer of 2021, we had a crash and unwinds from VCs, which pushed the skew (a measure of market sentiment) down to -25
That suggests that there is still more downward pressure on prices. However, the analyst also means that there could be a short-term bounce in prices, as the current skew of -5.8 is starting to move back into positive territory. If skew gets back to 10, this could signify that the market is beginning to turn around.
If you want to learn more about options trading, I wrote a comprehensive guide/article
https://romanornr.medium.com/options-trading-fd4d0bffb2c5
The volatility shock in the cryptocurrency markets earlier this month was intense, with prices plunging sharply. However, cryptos have stabilized since then, and volatility has decreased. We still see elevated volatility levels compared to before the shock, but it slowly returns to normal.
Inflation
Goldman Sachs analysts believe that US core inflation likely peaked in March, and they expect it to decline steeply in the coming months. That's based on their forecast model, which is shown in the chart. If their forecast is accurate, it would mean that inflation is no longer a concern for policymakers.
PPC
The put-call ratio
A high put-call ratio indicates that more put options are traded than call options, suggesting that investors are generally more bearish.
The put-call ratio has been trending higher for several months, and it is currently at elevated levels. That suggests that market participants are becoming increasingly bearish, which could signify that the market might be oversold.
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