My wife is a huge fan of this dance competition show.

Which means I, too, am a fan as it's what is on my TV on a regular basis.

My wife and mother-in-law have decades of dance experience, including ballet, tap, and jazz. Both have been coaches for dance teams and they even ran a dance studio for a while.

So when it comes to having a good ability to judge dancing talent, I will defer to them.

But every year, like clockwork, the season finale comes around and they get pissed because the winner is always some no-talent hip hop dancer that can't point their feet right and those lines... don't get them started about those lines.

The Favorite

This is where they miss the point, as do many when it comes to "talent shows" like American Idol or SYTYKD.

It's not America's Best Singer, it's about America's Favorite singer.

It's all about who has the most votes.

A Dead White Guy Told Me This

Just like these reality shows, the stock market is all about "what has the most votes," instead of the best company fundamentals or prettiest stock patterns.

Keynes was a big fan of this idea, with the idea that the stock market is like a beauty contest.

And to make money in the market, it's not about what you think will happen to the stock, it's all about what everyone else will do.

This has profound implications on any investment or trading framework. It makes reading the tape much easier because you're focused on looking for the motivations of market participants instead of trying to figure out if the stock will go up or down.

It will keep you out of momentum traps, thinking that a stock is too stretched and that it must come back to the average.

It makes technical analysis really interesting because you're now not concerned about whether the pattern is a double top or an ascending triangle, you now care about what other participants are thinking and where their stops would be.

In the past, I've made the mistake of focusing too much on macro events or how a certain chart pattern "has to work" instead of taking a sidestep and thinking about what those with Deep Pockets-- those that actually make the trend, are thinking right now. Using this idea of trading market motivations has helped me to tune out the noise and get better trades.

It's an interesting (and difficult) mindset to fall into but I encourage you to give it a try when analyzing stocks and markets.

Here is your daily mean reversion thought of the day:

Keep in mind, overbought can stay overbought.

Copy the Study

I've had a few requests for the code to this study-- this is for thinkorswim. It's nothing groundbreaking but very useful. As this is free, there is no technical support.

Dev from MA Study

declare lower;

input price = close;
input length = 200;

def SMA = Average(price[0], length);

plot DEV =(price/SMA -1 )*100;

DEV.SetDefaultColor(GetColor(1));

The S&P 500 is a hair away from breaking to new highs:

But the VIX is nowhere near the levels that we saw the last time the market was this high:

So is this the "smart money" piling into puts? I'm not so sure.

I don't believe that the VIX is that intelligent of an instrument relative to equity prices. The VIX futures and options market has matured into a very deep market, so I am not sure that VIX pricing is all that enlightened.

But what's more important is that you can't look at the VIX in a vacuum. You must say "relative to what?"

And when we look at the 1 month actual market volatility, this helps to explain why the VIX is elevated:

This can explain away most of the extra value in the VIX. At 1595 last month, the 1 month volatility was trading in the single digits. Because of the recent shake-and-bake in the market, that level is now nearing 15.

What does this all mean? Volatility markets aren't pricing in a "new normal" -- they are pricing in what has recently happened. In fact, I could argue that they are "underpricing" it, which means if you believe in smart VIX money it's actually a bullish signal.