(Originally posted in r/thecorporation on October 13th, 2020 — aka the day after the October top)
I wanted to share what I call my Four Horseman metric in brief, and I will fill it in more later when I get back/free from the clutches of homework.
The Four Horsemen:
- Rapid plunge in BTC/USD — This is an interesting metric, and makes sense if you understand that BTC has evolved from a hedge to a speculation play, which is why it arguably moves in lockstep with SPY most days. However, an interesting property I and many others have noticed is BTC seems to be a leading indicator of market movements, and rapid climbs/plunges tend to signal an incoming correction. See the chart on September 2nd, 2020 for an example.
- NOPE_MAD >= 3 End of Day: NOPE, or Net Option Pricing Effect, in principle looks at how dominant options flow trading volume is on the market compared to the more conventional shares volume. When the NOPE_MAD (median absolute deviation) compared to the previous 30 days is 3 deviations higher than normal, this means a red day the next day about 88% of the time (backtested to Mar 2019). You can check NOPE_MAD intraday here — https://thenope.info/nope/default/charts/SPY/2020-10-13 (the URL changes per day, so tomorrow will be 2020–10–14)
- The VIX rising with SPY — This usually is part of the parabolic phase, and means a metric fuck ton of calls are being written, which is pushing up option prices across the board. Usually VIX is a measure of downies-volatility, so when it and SPY both go up, it’s a Very Bad Thing. Also see September 2nd, 2020.
- Small Tech/Caps Leading Big Tech/Caps — This is a more interesting metric, and only makes sense when you understand what causes a Minsky Moment style correction (irrational exuberance). In a stable market, big caps tend to act as a source of strength/safe harbor, and when small caps are leading, this tends to signal intense bull mania, which usually precedes a correction.
- Microsoft going up parabolically — Microsoft is our favorite boomer stock for a reason — it is much more stable than AMZN or AAPL, and doesn’t like large movements. I noticed anecdotally this year that right before all the big tech corrections (3–5 days out) MSFT goes up exponentially, often more than the rest of the market, because smart money is looking for safe harbor.
I did not write this to predict a crash based on today’s behavior (oops — this didn’t age well!), but to generally inform about a metric I use to detect Minsky Moment style crashes. For more info on that — https://en.wikipedia.org/wiki/Minsky_moment
- Lots of these indicators are new, and due in large part due to the relative fuckiness of the current market. Bitcoin and SPY did not track until this year, and I only noticed the Microsoft effect I mentioned since about 6/5 onwards. This likely also happens in other boomer/safe stocks, but MSFT is by far my largest active trading position, hence why I noticed it.
- I will be adding a post soon specifically dedicated to the interpretation of NOPE and NOPE_MAD.