Riding the Green Wave: Momentum, Fast Actors, and the Next Market Spasm

5742 - 5801 is the line in the sand.

Currently, regardless of the rest of this post, the combined signal is green.

All green on the western front?

If we use the momentum signal I share on weekend posts to show an overview of the sectors in SPY alone, we get the chart below.

This chart only shows Bullish (Green) and Bearish (Red) signals. The white gaps indicate a Correction or Rebound, depending on price action.

Currently, it indicates a Correction.

If we look at the standard daily calculation for trends, two offsetting dynamics are in play:

The downside calculation is about to see two retreating metrics.

1. October 2023 is leaving the annual lookback, which should cause these bands to contract.

2. The current upside momentum is already very high.

Can momentum go higher?
It sure can! As I’ve explained before, there are periods when it’s better to hold the underlying asset or use options. Right now, holding long calls offers a better risk-reward due to the defined loss of premium.

This can lead to two outcomes:

1. Gamma squeeze dynamics on underlying prices can cause outsized effects.

2. Fast actors – those who consciously reduce underlying exposure to gain options exposure – have chosen to move quickly:

   • If things go well, we know when they’ll sell, reduce, or roll due to contract dates.

   • If things don’t go well, they may quickly reduce or short when the desired outcome isn’t achieved.

This all seems so simple!

Next layer:

I’ve talked about the crazy squeeze period for 4-6 months, and now everyone is talking about the Christmas rally that everyone knows is coming.

Do I fade myself?
No, we follow the price, which is currently green.

We use calls because of where we are in the momentum cycle.

Are we about to see another spasm in volatility?
Does upside volatility really count as volatility?

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Paper Dragons and Market Cap Gyrations

You can see more in this week’s weekend rundown and portfolio update.

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• Current Open Equity = 31.1%

• Stop Loss Trigger = 26.9%

• Current Closed Equity Return = 25.9%

I use the knowledge above to build a portfolio of the best performing stocks within the SP500.

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