Macro Tsimmis

intelligently hedged investment

Posts Tagged ‘DIA’

4Q11 Volatility Declines but to a Still-High Level

Posted by intelledgement on Mon, 23 Jan 12

The combined wisdom of all market traders and investors appears to be that risk declined last quarter, after a scary 3Q11…at least, the market was up and volatility was down…but we are not out of the woods yet. For the full story, check out “Nerve Racking: Q4 2011 Volatility Declines, But Only To Still-Elevated Levels,” published at Seeking Alpha.

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Market Volatility Spikes in 3Q11

Posted by intelledgement on Thu, 13 Oct 11

2008 initially looked a lot like 1929…but in the Great Depression, the stock market gyrated and sank for the following three years while this time around, the markets have been calm and healthy…until this last quarter, that is. For the full story, check out “Just When You Thought It Was Safe to Go Back in the Water: An Update on Market Volatility,” published on The Motley Fool website.

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BUY ProShares Short Russell 2000 (RWM)—Again

Posted by intelledgement on Fri, 26 Aug 11

We got the Bernanke bump we were expecting—the market is up today, although looks to be a more modest advance than we had expected. It would have been fine just to stay short here, but we will probably end up a bit ahead when we come back in at the close today (that is, the price we buy RWM at today will likely be a few cents less than what we got for the shares we sold on Tuesday).

We still expect that the most likely scenario is that The Powers That Be will manipulate the smoke and mirrors to mask the seriousness of our financial problems long enough to conduct an orderly U. S. election in 2012. However, the cracks in the wall—Eurozone sovereign debt issues, U.S. no jobs “recovery” and structural debt/demographic issues, BRICs growth slowdown, Middle East unrest, etcetera—are proliferating faster than the metaphorical wall paper can be applied and thus it is prudent to go short here (again) as a risk management tool to limit the potential damage if things fall apart sooner than we expect.

We are again utilizing the ProShares Short Russell 2000 ETF (RWM) as our vehicle of choice. Our logic is that a slow growth scenario is likely to negatively impact smaller companies more than large companies (although both will be hurt). This ETF is low on assets—$400 million where normally we prefer a minimum of $1 billion—but the robust average daily shares traded (up to 1.9 million) ensures adequate liquidity.

Previous index short-related posts:

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SELL ProShares Short Russell 2000 (RWM)

Posted by intelledgement on Tue, 23 Aug 11

We are cashing in our insurance here with a 4% one-week profit because with Europe essentially closed for business through the end of August, we believe the need for short protection here is outweighed by the risk of a temporary market surge in the face of the combination of no fresh bad news and (false) reassurances likely coming from Ben Bernanke at the Jackson Hole confab by the end of this week.

We expect to be back again by early September.

Previous index short-related posts:

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BUY ProShares Short Russell 2000 (RWM)

Posted by intelledgement on Tue, 16 Aug 11

We still expect that the most likely scenario is that The Powers That Be will manipulate the smoke and mirrors to mask the seriousness of our financial problems long enough to conduct an orderly U. S. election in 2012. However, the cracks in the wall—Eurozone sovereign debt issues, U.S. no jobs “recovery” and structural debt/demographic issues, BRICs growth slowdown, Middle East unrest, etcetera—are proliferating faster than the metaphorical wall paper can be applied and thus it is prudent to go short here as a risk management tool to limit the potential damage if things fall apart sooner than we expect.

This time we are using the ProShares Short Russell 2000 ETF (RWM) as our vehicle of choice. Our logic is that a slow growth scenario is likely to negatively impact smaller companies more than large companies (although both will be hurt). This ETF is low on assets—$400 million where normally we prefer a minimum of $1 billion—but the robust average daily shares traded (1.1 million) ensures adequate liquidity.

Previous index short-related posts:

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SELL ProShares Short S&P 500 (SH)

Posted by intelledgement on Fri, 12 Aug 11

We are cashing in our short “insurance” here at a profit. We still believe it prudent to be short, and we are planning to short the Russell 2000 instead of the S&P 500 because we feel the cyclical growth slowdown that is occurring is likely to hurt smaller companies more than larger ones. However, we may wait a few days to see how the latest European can-kicking effort goes; if the market believes there is a good chance it will “succeed,” then we may have an opportunity to get in at a significantly lower price.

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Another Boring Quarter of Below-Average Volatility…or Was It?

Posted by intelledgement on Mon, 11 Jul 11

The Intelledgement Macro Strategy Investment Portfolio is managed, obviously, using a macro-analysis approach. We look (primarily) at economic, political, social, and environmental factors to assess the likelihood of various potential events—e.g., Middle East conflict affecting oil supply, real estate bubble burst in China affecting oil demand, a sovereign debt default in Europe affecting all sorts of things, etcetera—and position the portfolio to avert the most likely bad consequences, if not actually benefit thereby.

So saying, generally speaking, we have little use for so-called “technical analysis”—methods of predicting stock price movements by analyzing historical data. Not to say that hedge funds that follow mechanistic, mathematical-based trading schema cannot be profitable…there are plenty that are. (Although most of those focus on sundry arbitrage opportunities that take systematic advantage of inefficiencies in the market such as the yen carry trade—and not, technically speaking, genuine technical analysis.)

Be that as it may, we do track one technical indicator here: market volatility. We do that because it’s a reasonably reliable gauge of perceived risk levels. Roughly 73% of the time, when volatility in the S&P 500 goes up—when the average annual daily change in the price of the index (up or down) is greater than it was in the prior year—market performance for that year declines compared to the prior year.

And based on volatility levels, the perception of risk has been remarkably low for the past two years, and is continuing to decline. The second quarter of 2011 marked another non-event, volatility-wise. Market volatility declined, quarter-over-quarter, from slightly below average in 1Q11 (daily change of ±0.58%) to notably below average (±0.54%)—from inception in 1957 to now (30 Jun 11), the all-time daily average change in the S&P 500 index has averaged ±0.62%. In fact, for the first time since the 2008 crash, volatility for the trailing twelve months (±0.59%) has dipped below the all-time average.

Volatility hit an all-time high in Q4 2008—breaking the record set in 1929 (by the DJIA)—with mind-boggling peak average daily change of ±3.27%. (That’s a whopping 427% above the average.) For 2008 overall, it was a record ±1.71%, or 176% above average. But since then, it has been dropping steadily: ±1.19% in 2009 (92% higher than average) and ±0.74% last year (19% above average). Now, through the first half of 2011, volatility is ±0.56% (10% below average). The following chart tracks the annual average daily volatility for the S&P 500 index from 1950 to 2011. (Note that while the index was implemented in 1957, in order to get the most meaningful/largest feasible data set, we include retrospective data back to 1950.)

The following chart shows the quarterly fluctuations in volatility levels for the S&P 500 (red line) from a year before the crash—the fourth quarter of 2007—to the present, compared to volatility measurements of the Dow Jones Industrial Average (blue line) from a year before the 1929 crash. (We use Dow volatility data for the 1929 crash because the S&P 500 was not around back then.) Also shown in the chart is the average daily volatility level for the S&P 500 (±0.62%, as mentioned previously).

Of course, the fourth quarter of 1929 was just the beginning of an extended period of market decline that persisted for years. Consistent with our research into the relationship of market volatility and performance, volatility levels in the 1930s continued to surge well above normal. Thus, it is encouraging that the trendlines have been diverging for the past two years.

But even if the volatility levels for this past quarter were boring, the macro situation was anything but. With the USA failing to come convincingly out of recession, now involved in three wars, and no solution to structural entitlements obligations or the growing national debt in sight, with the BRIC countries apparently slowing their growth rates, with Europe barely having dodged one sovereign debt bullet with Greece and facing several more (Portugual, Ireland, Italy, and Spain, at least), with unrest in the Middle East spreading…well, in the Intelledgement Macro Strategy Investment Portfolio, we are currently short the dollar and the S&P 500 index, and contemplating adding more short positions. A couple of years’ worth of denial on the part of the market as to how serious things are does not—in our view—obviate the need for investors to maintain some insurance against a sudden and severe downturn, should some bad combination of these various exigencies come to fruition.

Previous volatility-related articles:

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Judging by Market Volatility, All is Well

Posted by intelledgement on Mon, 11 Apr 11

The first quarter of 2011 marked another non-event, volatility-wise. Market volatility did tick up, quarter-over-quarter, from the extraordinarily low 4Q10 reading—the lowest level of volatility in three-and-a-half years—but remained 6% below average. For six of the last seven quarters now, the S&P 500 index has experienced an average daily change of close to the all-time (since inception in 1957) average daily change of ±0.62%.

Volatility hit an all-time high in Q4 2008—breaking the record set in 1929—with mind-boggling peak average daily change of ±3.27%. (That’s a whopping 427% above the average.) For 2008 overall, it was a record ±1.71%, or 176% above average. But since then, it has been dropping steadily: ±1.19% in 2009 (92% higher than average) and ±0.74% last year (19% above average). The following chart tracks the annual average daily volatility for the S&P 500 index from 1950 to 2011. (Note that while the index was implemented in 1957, in order to get the most meaningful/largest feasible data set, we include retrospective data back to 1950.)

We track market volatility because it’s a reasonably reliable gauge of risk levels. Roughly 73% of the time, when volatility in the S&P 500 goes up—when the average annual daily change in the price of the index (up or down) is greater than it was in the prior year—market performance for that year declines compared to the prior year. And when volatility declines year over year, market performance improves 55% of the time.

The following chart shows the quarterly fluctuations in volatility levels for the S&P 500 (red line) from a year before the crash—the fourth quarter of 2007—to the present, compared to volatility measurements of the Dow Jones Industrial Average (blue line) from a year before the 1929 crash. (We use Dow volatility data for the 1929 crash because the S&P 500 was not around back then.) Also shown in the chart is the average daily volatility level for the S&P 500 (±0.62%)

Of course, the fourth quarter of 1929 was just the beginning of an extended period of market decline that persisted for years. Consistent with our research into the relationship of market volatility and performance, volatility levels in the 1930s continued to surge well above normal. Thus, it is encouraging that the trendlines have been diverging for the past two years.

Having said that, it’s important to keep in mind that volatility is not a leading indicator; black swan events engender volatility, not the other way around. Should Italy or Spain default, should Iran attack or be attacked by another country, should rising sea temperatures set off a major extinction event—or any equivalent event occur—then all bets are off.

But for what it’s worth, the current consensus of U.S. investors continues to be that the worst is behind us, and that risk levels going forward are no longer elevated.

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Market volatility down again in 4Q10

Posted by intelledgement on Wed, 12 Jan 11

Well…we don’t think things are back to normal, but stock market investors sure seem to. Volatility—a good indicator of perceived risk—dropped below the 50-year average for the first time in three years in 4Q10 and overall, 2010 was just 19% above average (way down from 2008-9). For the details, check out “For Market Volatility, No News Is Good News,” published on The Motley Fool website.

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SELL ProShares Short QQQ (PSQ), Short Dow30 (DOG), & Short S&P 500 (SH)

Posted by intelledgement on Thu, 04 Nov 10

Well, either you’re closing your eyes
To a situation you do not wish to acknowledge
Or you are not aware of the caliber of disaster indicated
By the presence of a pool table in your community.
Ya got trouble, my friend, right here,
I say, trouble right here in River City.

Thank you, Harold Hill. Yes, indeed, we got trouble, all right.

The economic toilet is still stopped up with unsalable toxic assets that our government in collusion with the banksters that created and peddled them refuse to reprice reasonably, principally derivatives but also mortgages on underwater properties. (They refuse because honestly marking these assets to market would cause several TBTF duckpins to fall into insolvency and make it really hard for them to pay out their bonuses, or deliver their political contributions, to say nothing of being able to offer cushy sinecures to “deserving” former regulators.) Meanwhile, the Fed continues to artificially dampen interest rates and attempt to flush more money into the toilet in order to encourage folks to buy—and thus maintain the fictional value of—overpriced assets. Of course because they refuse to fix the toilet, it is overflowing and the excess dollars are spilling out into China and India and Brazil and most everywhere else, roiling those countries’ economies.

Meantime, our government, amid the first detonations of the baby boomer demographic time bomb, has spent two years pondering the looming entitlements funding chasm and has ultimately decided to increase our commitments via Obamacare. Meanwhile, we are still bleeding money in Iraq and Afghanistan, still running a huge trade deficit, and with unrelenting salvos of anti-small-business bombardments (Obamacare regulations and levies, financial reform regulations, reinstitution of the estate tax, increase of the income tax), have helped to stymie private sector job growth, and real unemployment is stuck around 17%.

And many state governments such as California and Illinois—not to mention national governments such as the PIIGS—face immediate sovereign debt issues more acute than the Feds.

Whoa! Are we going short here, or covering our shorts?

We are covering them. And the reason we are covering them is not because we think things are looking up. We have been short the US equity indices as insurance against a black swan event, and we do not think that the risks there have appreciably narrowed. But the dogged initiatives of the Federal Reserve to maintain higher asset prices have created a new, overriding risk: the risk that the oversupply of dollars will drive the value of the greenback down so effectively that asset prices, while they may not actually increase in absolute value, will increase significantly in nominal dollar value. In other words, the risks of being short equities here in dollar terms now exceeds the upside, because even in the event of a black swan event that depresses asset valuations in real terms, the relative value of those assets as measured in dollars could still increase.

So, while we still believe the efforts of the U.S. government to maintain these overvalued asset prices in the face of market pressure to reprice them at their real value are doomed fail, the risk that the dollar will suffer collateral damage in this inglorious attempt to alter reality has become acute, and accordingly, we are closing these short positions.

Previous DOG/PSQ/SH-related posts:

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