Market Curiosity: Exploring Markets And Systems

January 23, 2011

“Stability is destabilizing”: Is this why consolidations lead to trends?

Filed under: Favorite Posts, Long Calls, Short Puts, Systems — Jeff Fitzmyers @ 10:55 am

Supposedly there is a rule of thumb that stocks spend their time: 70% consolidating, 20% trending up, and 10% trending down.

That could be why:
– Selling puts is profitable about 90% of the time.
– Put sellers can experience drawdowns that are infrequent, but high amplitude.
– Put sellers are well advised to cover for seemingly small reasons.

Macroeconomic Resilience blog: …a period of stability induces behavioral responses that erode margins of safety, reduce liquidity, raise cash flow commitments relative to income and profits, and raise the price of risky relative to safe assets–all combining to weaken the ability of the economy to withstand even modest adverse shocks.”

Why save for a rainy day when it hasn’t rained lately?

Is that also why the volatility Index is basically inversely correlated with the stock market?

Does shorting puts on value stocks and buying momos (IBD Top 50 stocks) both work for the same underlying reason: stability is destabilizing?

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