Week in review June 3-7 2013
S&P 0.7%
Dow 0.83%
Russel 2000 0.34%
GLD -0.65%
TLT(Barclays 20 year us treasury index)
-0.94%
VIX -7.31%
“Far more money has been lost by investors
preparing for corrections or trying to anticipate corrections than has been
lost in the corrections themselves” (Peter Lynch)
June started off ominous
as we saw a continuation of the largest selloff the market has seen in 2013. On Thursday’s low (1598 in the S&P 500)
the marked had slumped a total of 5.27% from the year-to-date high (1687), and
the CBOE volatility Index VIX had climbed to 18.51. Technical analysts look for
the S&P500 to be at a relative low while the VIX is at a high. This coupled with an increase in volume
signals that there is a culmination in the selling. When the S&P fell below the 50 day moving
average of 1606 the selling pressure peaked and when the dust settled, the SPX
closed at 1643 for the week. This rally
got wind in its sail from the lukewarm American job report this morning, giving
American investor’s confidence that the economy is on stable ground, and that
the Fed tapering may not be as soon as some thought.
The market slump first
began in the US with a hint of Fed tapering, which has caused significant
volatility in the bond market. The Fed
comments eventually caused equities to fall, giving us a taste of what could
potentially happen when the fed does actually start its tapering. If the market is this volatile when the fed
suggests it could tapper, what will happen once it actually does? And what will happen if they decide to
unwind? Traders of volatility are
certainly expecting a rocky third quarter. To take advantage of that possibility a
popular trade this week was to use this short term spike in volatility to take
profits on their current hedges, and roll them out into the fall. We still view that the larger risk in the US
market is in treasuries, but, as we have seen, volatility has a way of spilling
over in the short term to equities. This
morning former Fed Chairman Alan Greenspan attempted to calm nervousness in the
equities markets by stating "The most important
positive force in the economy at the moment is the fact that equity premiums
are so high, which means the downside on stock prices is quite limited,"
he said. "If we can get stock prices to rise, which they will if this
thing stabilizes, then you get a lot of asset-growth effect on the economy." Suggesting that downside risk in equities is
limited due to the high yields they are paying while at the same time warned of
a potential black swan bond event if the fed does not unwind their assets
correctly.
The
market was also heavily impacted this week by the tremendous volatility coming
out of Japan. The Nikkei was 20% off its
highs in 11 days…and six of those days were up! This is a cautionary sign of what can happen
when there is an abrupt change in fiscal policy. The carry trade, (sell yen, buy higher yielding
assets) had become more crowded than rush hour traffic. Japanese markets had been on a tremendous
tear all year long. The Fed Japanese
bank was printing money at a tremendous rate, and many people were scratching
their heads sitting on the sideling thinking this is too easy, I need to get
long the Nikkei. That mentality helped
the Nikkei rise 40% from November.
However what goes up fast can sometimes go down fast when it
corrects. As soon as there was a hint of
negative economic data everybody wanted out at the same exit. People thought the fiscal policies pronounced
by ABE would not be enough to pull Japan out of deflation. Simply put, the Nikkei had gone to fast too
soon. The stock market had grown ahead
of the economy on speculation. However
in America there is a saying, “don’t fight the fed”. In Japan, with their powerful fixed income
market, that saying should hold true. If
the BOJ is committed to create inflation, it will eventually create it. Therefore we were buyers of the Nikkei this
week on weakness.
What we are watching for next
week June 10-14
June option expiration is two
weeks away. If prices are stable options
will start to decay more rapidly as the week progresses. The first three days of the week is light on
economic data. Typically on light
economic data days we see the market continue its current trend. We will be watching to see if Japan will
continue to rally off the good economic data out of the US on Monday.
How are we positioned to profit
from that?
We continue to hold our long
equities portfolios. We are not going to
fight the Fed or the BOJ. They continue
to ease and we will not jump too far ahead of them. Traders should consider the lesson learned
from the Japan carry trade, you don’t need to swing for the fences, remain long
but hedged. This week we took advantage
in the pop in market volatility by selling out some of our volatility
hedges. And for some strategies we were
able to get short volatility at which will be profitable if the VIX remains
below 16. We maintain our core strategy
to balance long stock positions with a tradable volatility hedge.
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