Displaying items by tag: volatility

(New York)

The market is right around all time highs and economic and earnings figures are healthy, all signs that the market is headed higher. That said, prices could take a dip at any time and many are worried about a reversal. Some are particularly worried about funds having to sell stocks to rebalance their holdings of equities versus bonds (which have performed poorly of late). So how can one profit from a market fall? Here is a good options strategy for doing so: buy S&P 500 put options at $287 and simultaneously sell $285 put options, both of which expire May 3rd. The market volatility has been low, so the options are cheap, and the spread strategy limits losses.

FINSUM: If you are just playing for volatility based on a likely rough month-end rebalancing, then this could be a good strategy.

(New York)

JP Morgan is telling investors to get ready for a “new normal” of volatility. The bank’s CEO, Jamie Dimon is warning investors that global headwinds and liquidity constraints because of tighter regulations will mean there are bigger price swings in markets from now on. Dimon cited the Fed’s policy change, Germany’s slowdown, Brexit, and the US-China trade war.

FINSUM: We are so tired of this argument that tighter bank regulation hurts liquidity and leads to bigger market swings. Bank-provided liquidity is the great myth of the post-Dodd-Frank era. When markets get tough, bank trading desks often step away from the market, meaning liquidity vanishes just when you need it most.

(New York)

There are a lot of worrying signs out there right now, but one thing that has bolstered optimism is the strength of the stock market in 2019. That said, there are signs appearing that underlying fundamentals are weakening. In particular, daily moves are shrinking, down from 0.9% in the 4 months leading to February, to just 0.4% in February. The slowdown in trading momentum is not only worrying in its own right, but also because the exact same trend appeared before the falls of February and December 2018.

FINSUM: Our counter argument is that average index moves were quite small through several solid years between 2014 and 2018, so it dos not necessarily indicate a problem.

(New York)

As our readers will know, we spent the better part of last week at the Inside ETFs conference. As part of our time there, we are planning to feature a couple of ETFs which we think might be interesting to advisors. The first one we want to feature is a special fund from Legg Mason, the fund is called the Legg Mason Low Volatility High Dividend ETF (LVHD). We were lucky enough to meet with one of the fund’s specialists, Josh Greco, at the conference, and his passion for the fund’s approach really shined through. The fund’s own words describe it best, it seeks to track “the investment results of an underlying index composed of equity securities of U.S. companies with relatively high yield and low price and earnings volatility … LVHD may benefit investors who want income but are concerned about the volatility that can come from traditional equity income investments”. Basically, the idea is to get yield and upside, without so much of the volatility that is traditionally associated with equities. Mr. Greco contextualized the utility of the approach succinctly and convincingly, explaining that as clients’ lives elongate they are going to need to stay in equities longer to get capital appreciation. Accordingly, this fund seeks to de-risk some of that necessary exposure while still giving significant upside and yield. The fund has about $600m in AUM, is widely available, has an expense ratio of 0.27%, and a dividend yield of 3.48%.

FINSUM: In our mind, this fund does an excellent job of fusing some of the best elements of fixed income (yields and less volatility) with the best part of stocks (capital appreciation). It may be a great fit for older clients that need to keep a significant allocation to equities. It is also quite affordable at 0.27%.

(New York)

One of the hottest trades in the last several months has been to buy a basket of low volatility stocks. The idea is that one can insulate their portfolio from the market’s fluctuations by buying stocks that are less likely to see swings in value. The problem is, the trade has gotten very crowded. Legal & General Investment Management says that “Low volatility might be becoming vulnerable as investors chasing recent performance and buying into gloomy 2018 outlooks flock into it … It is becoming a relatively consensus position, which for us is a warning sign”.

FINSUM: Low volatility stocks held up well in the tumultuous fourth quarter, but the attractiveness of the strategy has made valuations quite high. Such stocks typically lag in upward markets, so there does seem to be some significant risk here.