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To say that the U.S. stock market is a casino would be unfair to the casino.

Consider that the S&P 500 declined by nearly 50 points between 12:30 p.m. Friday and 1:45 p.m. yesterday on little news, then rebounded more than 20 points between about 3:15 p.m. and the close. S&P 500 futures then fell broadly last night, but have rallied vigorously this morning to extend yesterday afternoon's late rally -- again, on no real news.

It's been a constant refrain of mine throughout the last two years that our market's mechanism is broken, and that market volatility will be on the ascent:

"The VIX breaches 40 to the upside during the year."

-- Doug's Daily Diary, 15 Surprises for 2016 (Part One)  (Dec. 29, 2015)

Or, as UBS recently put it:

"We would be surprised that in this highly leveraged world, in combination with a structural decline in market liquidity, a seven-year cycle decline would just be mild. We think it's actually just the other way around. In this context, we see last year's rise in volatility as just the start of a period with exceptionally high volatility, where we wouldn't be surprised to see record spikes in volatility over the next 12 to 17 months. So, another key call we have for the next 12 to 15 months is to be long volatility.

Particularly with regards to the ongoing bear market in high yields, we think that volatility in equities is too low and this will be one of the key charts for 2016.

Last year, we argued that we generally see all these divergences as a leading indicator for an important top in global equities. Twelve months later, we are in the next phase of the global rolling-over process. We see more and more markets having already fallen into a bear market. On the other hand, we can clearly say that without a new momentum impulse coming from the fundamental world, the air for the remaining outperformer markets will get increasingly thin."

-- UBS

And, as Zero Hedge noted in this chart:

 Timeframes

"Foot on the pedal Never ever false metal Engine running hotter than a boiling kettle."

-- The Beastie Boys, No Sleep Till Brooklyn 

With so much volatility in the air, I believe that traders/investors must assess their timeframes and risk profiles and not stray. I see players basically facing one of two core options based on their personal investing timeframes:

Short-Term Timeframe. In this setting, it makes sense to try to partner with volatility. This requires an emotionless disposition that means leaving your brain at times at the trading-floor door. Like short selling, this isn't for everyone -- indeed, it's only for the few.

Intermediate- or Long-Term Timeframes. If you have a longer timeframe, attractive opportunities will emerge and you should capitalize on them. But embracing this strategy requires genuine patience and being true to your timeframe.

Navigating the Market

"Price is what you pay, value is what you get."

-- Warren Buffett

I've adopted a negative market view over the last year, and I continue to press it.

I expect the S&P 500 to record a low-double-digit decline for 2016 -- but the trip won't be a straight line downward. Instead, it'll likely consist of continued wild swings in a market that's without memory from day to day.

So, adopting a negative overall view doesn't preclude me from having occasional short-term positive twists -- as I do right now, which has led to my current medium-sized net long exposure.

This can occur particularly when investor sentiment plummets, as I believe it has these days (just check out RBS' "Sell Everything!" call). Brokerages rarely cry "Sell Everything!" at market tops -- they more typically do so at market bottoms. And when bulls become bears (as has been the case recently), that's often bullish for the near term.

As I mentioned yesterday in an interview with Bloomberg Radio (listen here starting at the 4:20 mark), I disagree with market-newsletter publisher Dennis Gartman -- who said earlier that "on balance, the market is right."

I believe the market is inefficient and even irrational at times over the near term, in part due to the role of momentum-based quant strategies. How else can we explain the market highs of last May, followed by the lows of late August, September and October and then the highs of late December?

This volatility creates a near-term dynamic that provides opportunities to traders, which I've embraced. But these trends have also negated the value of charts and technical analysis to some degree. In other words, it's different this time.

Generally, I've picked my spots to "short the rips and cover the dips" -- and thus far, it's worked out just fine over the last year.

At the same time, I've opportunistically traded or invested selectively on the long side, and I plan to continue doing so when good values present themselves. As an example, I've identified the retail and banking industry over the past few months as having attractive intermediate upside/downside ratios.

Importantly, a hedge fund (operating with a book of longs and shorts) must be hedged on the long side owning relative value and on the short side being short on relatively overvalued securities.   

My Current Strategy

"The future is not what it used to be."

-- Yogi Berra

As mentioned above, I'm net long despite a negative overall market view. That's because I see: 1) some emerging values that have developed in the recent vicious market decline, 2) the rise in negative sentiment ("Sell Everything!") and 3) a tradeable bounce possibly occurring over the next few weeks.

Still, I realize that I have to be responsive going forward to changing market conditions. Gamma hedging, risk-parity trading and other quant strategies geared toward allocating to volatility and/or price-momentum tactics have begun to exacerbate the market's short-term directional trends and volatility. This could continue until we see the "Mother of All Flash Crashes" -- something I warned about in my 15 Surprises for 2016.

But heightened volatility and increased random price action could continue even after that. After all, the HFT lobbies are strong, the exchanges are beholden to (and profit from) HFT participants and quite frankly, the U.S. Securities and Exchange Commission is too weak to intervene.

It's a sad state of affairs in that many retail and even institutional investors are rapidly retreating from the investment-playing field. As I've previously written, some very well respected hedge hoggers are folding up their tents (Seneca, SAB Capital, Fortress Investment Group's macro fund (Novogratz etc.). That's because the investing backdrop no longer corresponds to fundamentals and fails to reflect the real economy's condition.

When prestigious hedge funds fold, it's rarely the sign of a market top. Like brokerages that yell "Sell Everything!", it's typically a sign of a market bottom. For this reason and other sentiment-related ones, I'm short term bullish but intermediate-term bearish.

This is the reality of how tough the game has become. If it's too freakin' hard for the hedge-fund industry's kingpins, it's too freakin' hard for most of us.

This will likely change -- but no time soon. I believe there will be No Sleep Till Brooklyn in 2016.

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