Revisiting #NewNormal and $SPX 1680

Now is a good time to look back at the #NewNormal and discuss possible trading patterns for US equities for the remainder of 2013. The #NewNormal was a description I came up with in late 2012 to describe the slow steady grind higher in US equities that was rarely interrupted by periods of higher volatility. This state of the market existed despite the daily reminder of macro risks around every corner, and slowing earnings growth in the US. Most of the traders I know attributed the #NewNormal to the Fed’s QE strategy which made market participants feel “safe” and thus were willing to put money to work in equities on even the slightest market pull back. Now that the Fed has signalled that their QE strategy will begin to wind down in the next six months, most have concluded a slow steady grind is no longer in the cards for the remainder of 2013.

If it is the case that the remainder of 2013 will provide a higher level of volatility it makes sense to adjust some aspects of my trading. The first thing I will do (am doing) is be more cautious on swing positions. During a lower volatility period where the market is grinding higher overnight gap risk is minimized. In an environment of increasing volatility with a damaged longer term uptrend gap risk increases. It’s been about two years since we have seen an extended period of heightened volatility with large gaps in both directions. But when these conditions existed it lowered the risk/reward considerably for swing positions.

The second change that makes sense to me under current market conditions is to take more off the table quickly. So for traders out there who consider exiting winning positions to quickly as one of their weaknesses guess what it just became a strength. It makes perfect sense to hold your winners as long as possible in a slow grinding market but taking profits and actively managing positions is far more important in a higher volatility environment with multiple reversals each day.

We saw a change in price action on May 22nd when the market up trend had accelerated to the point where it made sense for some of the faster money in the market to bail and we had a powerful reversal day. That day we also touched SPX 1680 intra-day, which had been a price level I thought we would see in 2013 if #NewNormal conditions remained intact. This weekend marks one month from that reversal day and the longest period since January that the market has not made a new multi-year high. The chances of us returning to the slow grind anytime in the near future seem low. However, I do think we are likely to see a large tradeable range continue to develop and eventually we will make a new yearly high. If for no other reason that it is extremely unlikely that the SPX 1680 level i targeted in late 2012 will serve as the high water mark for 2013.