Get Used to Volatility

After a nice sustained rally this year, the market seems to be having second thoughts.  When markets turn, there is a lot of volatility at the high and the low.  Great uncertainty sweeps through.  There are no real North Stars that people can follow to get a good handle on where the market will head next.  At the same time, Monday morning quarterbacks look for smoking guns.

In the rear view mirror, everything is obvious.

I don’t mean to say the market can’t rally anymore.  It certainly can.  But, I sense a little reality is starting to wash over it.  Sort of reminds me of 1999.  Internet stocks were the darlings of the marketplace.  No matter what news came out, they rallied.

When President Bill Clinton was impeached, I thought the market might stumble, but it didn’t. It was a freight train up, but then had many rallies and breaks as people tried to get on for the ride. There was a trader back then that walked into the S&P pit and hid his position from his clearing firm. They dragged him off the floor and liquidated him. He had a “Texas spread” on, long puts and short futures.  I heard it only cost him $500k.  Good thing, because from February to May he’d have had a rough ride.
SPY Chart

SPY data by YCharts

In October of 1999, I was short a bunch of Nasdaq futures ($NQ_F).  All of a sudden, the market jumped, and not just a little.  The USS Cole had just been bombed.  I looked at my screen and said, “You don’t buy markets during terror attacks, you sell them.”.  But my screen and the market didn’t care.

It was just another example that no matter what the news, the market was poised to go higher.

Seems like that is what we have today. No one knows direction, so when it starts to move, everyone jumps on the train hoping that this time the market will show some sort of trend.  It’s been a difficult trade if you want to position yourself.

Nassim Taleb in his book about Black Swan’s talks about his trading strategy.But, from what I can gather that strategy is extremely expensive to run. Buying puts and rolling them over, or buying volatility and continuing to roll while you wait for the break can burn through a lot of cash.  Ask treasury note option traders who have been bearish the interest rate market because of Fed action since 2009.

I don’t know what the strategy is to make money in a market like this.  But my gut tells me something isn’t right. Summer markets are known to be more volatile than other markets because generally less volume flies through them.  But that hasn’t been the case. There have been some pretty high volume days recently.

English: Humpty Dumpty at Funspot
Humpty Dumpty (Photo credit: Wikipedia)

Maybe all the chickens that governments have pushed out the door in the last few years are coming home to roost.  There has been so much excess created from consistent QE, and no cost interest that when the tide turns, it’s going to be a tsunami.  If you can afford it, and take some pain it might be smart to begin acquiring some puts on the stock market, or to get long some $VIX calls.  The VIX seems pretty cheap.

Of course, you could always bet on yourself.  Buy hard productive assets, lock in the rates.  Look for entrepreneurial opportunities that will grow faster than the rate of inflation.  It’s the only bet you can make with some certainty.


thanks for the link Kirk Report.

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