Macro Tsimmis

intelligently hedged investment

Posts Tagged ‘SPY’

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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McRIBS Reconsidered: Taking Currency Fluctuations Into Account

Posted by intelledgement on Tue, 27 Dec 11

A few weeks ago, we published an article reviewing the performance of the stock markets of 16 nations—including all the BRICs—for the first 10 years of the 21st century…. An astute commenter pointed out that my analysis hadn’t factored in the decline of the dollar. The commenter stated that the dollar had declined 20% in value in the first 10 years of the century—it turns out that inflation from 2001-2010 inclusively actually amounted to a cumulative 21%—and thus, he complained that the chart showed the S&P 500 value as flat for the decade (a compounded annual growth rate of fractionally less than 0%) when in reality the absolute value of an investment in the S&P 500 from 2001 to 2010 would have been down by 20% or so. Now, all the bourse indexes were valued in terms of the nominal value of their respective currencies…. However, using nominal native currencies over 10 years actually does not necessarily provide a perfectly level playing field, because it ignores currency fluctuations. In looking at the changes in value for each currency relative to the dollar over the decade, these were not insignificant.

And so this sequel article published earlier today by The Motley Fool, Reconsidering the “New” BRICs, adds in the effects of ten years of currency fluctuations. Turns out some markets—e.g., Australia up 4% annually for ten years in nominal terms but up 10% annually when we take the appreciation of the Australian dollar into account—did materially better…and some did worse.

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Out with the BRICs and in with McRIBS

Posted by intelledgement on Thu, 20 Oct 11

It has been a decade since Goldman Sachs economist Jim O’Neill coined the acronym “BRIC” (Brazil-Russia-India-China) as a handy shorthand term for emerging-market economies that were likely to experience above-average growth in the process of converting from predominantly rural, agrarian living to more urban, industrial modes.… [T]here’s not much debate among macro-analysts as to the continued robust validity of O’Neill’s basic insight. It would take a lollapalooza of a black swan to dissipate the inertia of the BRICs—something on the order of an epidemic or a catastrophic natural disaster that killed many millions. So, in that light, the pertinent question is not where the BRICs bus is headed, but rather, who is going along for the ride.

And that question is the focus of Forget the BRICs; Here’s a Better Way to Think About Emerging Markets, published earlier today by The Motley Fool.

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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 S&P 500 (SH)

Posted by intelledgement on Fri, 23 Sep 11

We are increasing our short position here as a hedge against the increased risk of a major sovereign debt default—or potentially a series of defaults—in Europe that could negatively impact international banks (in Europe, the Americas, and Asia) and lead to a credit freeze similar to the one we experienced in 2008. As we have in the past, we are going with the Proshares Short S&P 500 (SH) ETF, which “seeks daily investment results, before fees and expenses, that correspond to the inverse (opposite) of the daily performance of the S&P500® Index.”

Previous SH-related posts:

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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.

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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.

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