Displaying items by tag: volatility

(New York)

One of the behaviors that we like to follow to see the underlying health of markets is whether investors are “buying the dip”. Such behavior tends to indicate a fundamental belief in the direction of the market. Therefore, the recent drop off in investors doing so is worrying, but not for the reason that seems obvious. The lack of buy the dip is because until this week, the market had rarely fallen this year. That has meant buying behavior has been concentrated in the hands of bulls not afraid the buy into a rich market, which left many discount-seekers looking from the outside in. Now, many top analysts, and likely investors alongside them, have turned bearish.

FINSUM: The velocity of the market’s gains this year has been very impressive, but it naturally makes a lot of people worry it could come down just as fast.

(New York)

The markets are gleeful right now. Stocks are up 25% since their bottom in December, and things on the economic and Fed fronts look rosy. However, Citi says investors need to get out of some assets before “rain spoils the picnic”. The bank is worried about the difference between asset prices and underlying economic conditions (when looking globally). Its biggest area of worry is in corporate bonds, which have seen spreads to investment grade narrow sharply, especially in high yields, which look overvalued. Investment grade debt is troubling too, as debt levels jumped by their biggest amount in 18 years over the last 4 months. Citi thinks companies are burning through way too much cash for the growth levels they are achieving.

FINSUM: So Citi thinks this is going to be a bond market reckoning (which would surely impact stocks too). That is different than the consensus, but perhaps a good way to view the situation.

(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.