April 9, 2018
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Last week I commented about how the Wise Guys were licking their chops waiting for volatility to return. When the VIX was hovering around 10 for most of 2017 the banks and hedge funds were crying about how hard it was to make any money in their trading business. There was even talk of the “new market” in which volitivity was a thing of the past.
I remember many markets in which volatility was a thing of the past until it showed up again. Remember the Dot Com bubble of the late 1990’s, when we had new economy and old economy stocks. The new economy stocks didn’t need to make money, all they needed was an idea and boom the next thing you know it was an IPO and then suddenly it was gone. In the meantime, old economy stocks, which were a thing of the past continued to make Warren Buffett billions.
Next, we had the housing bubble which made the dot com bubble look like a ripple in the ocean. The “wealth effect” where investors took the equity in their house and bought things they couldn’t afford was the next bubble and when that one broke it took years to sort out the winners and losers. One thing for sure. All of the large financial firms that took unlimited risk busted out.
So now it appears that the nine-year bull is finally running out of steam. The big banks and hedge funds are feasting on clients that are either trying to protect the gains of the last few years or speculators that are taking big positions in a wildly swinging market. In any case the good times are back for the Wise Guys and you can be sure they will make the most of it while they have olatility on their side.
Ask Mr. Seifert
I am constantly asked questions about trading and how to exploit certain market factors to insure success. Each week I will answer one of those questions with a short paragraph which will cover the trading subject.
What is Beta, and how can I use it to help my portfolio?
Beta is the component of the market that allows investors to compare the volatility of an individual stock to the market in general. If a stock has a Beta of 1.0 and we are using the S&P 500 as the index we are comparing it to that means that for every 1% that S&P 500 moves, the stock should move the same percentage amount. In this suddenly volatile market environment, understanding the concept of beta is extremely important if you have a diverse portfolio.
If the Beta for a stock is .8 it means that the stock should move of 80% as much as the Index. If the stock has a Beta of 1.6, it means that the stock should move 1.6% for a 1% move in the underlying index. One thing should be noted. If the market is breaking the Beta will tend to accelerate as volatility increases. As an example, if a stock’s Beta is 1.0 and the market breaks, there is a good chance that the stock will break more than the index’s 1%.
The Wise Guy Report: The View From The Electronic Floor
Each week I talk about how the Wise Guys (floor traders) find the soft spots in the market and take advantage of price dislocation. Let’s look at last’s week price action from the electronic pits in three major commodity markets: Gold (GC), Crude Oil (CL) and Long-Term Interest Rates (ZB). On the equity side, I cover MSS which is the Mister Seifert Sez Composite Index. This is a proprietary index that I created which measures the dollar flow of the four major indexes (S&P 500, Nasdaq 100, Russell 2000 and the Dow Jones Industrials) on an unweighted basis.
Equities Remain In Turmoil (Congestion)
The big story again this week was the volatility in the equity markets. The intraday moves have been unreal with the DJIA having ranges of close to 900 points. Volatile congestion markets are what the guys on the street are looking for. They can’t wait for the panic followed by a reversal and then the short covering panic.
This week the big five banks reported that their trading desks were feasting and first quarter would be a monster when the results are in. The street loves uncertainty, and in many cases, tries to make it worse. Last week the government released data that showed that jobless claims had reached a 45 year low. Although that number may seem bullish to the average investor it was very bearish with the street. On Friday it reported that unemployment remained at 4.1% a 17-year low but that it revised the jobs number for January and February down by about 50,000, another a bearish number. Throw in the new “trade war” with China and it is putting a damper on expectations. Although the week was volatile, the markets closed with only a marginal loss, as the MSS lost slightly less than 1%, and the VIX only rose about 6%. Maybe all the bad news is in the markets are going to calm down. We will see but, in any case, it will be a challenge and that is what Market Edge and Optionomics were built for!
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Mr. Seifert