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Market Volatility Bulletin: Clawing Out Of Purgatory

Apr. 03, 2018 11:35 AM ETDIA, EEM, EWJ, EWY, FXI, GLD, IWM, QQQ, SLV, SPY, SVXY, TVIXF, UVXY, VXX17 Comments
The Balance of Trade profile picture
The Balance of Trade


  • Stocks are spending the morning (and most of the pre-market) trying to shake it off.  VIX looks extremely neutral as to whether this is doable.
  • Implementing trade or investment decisions can be very scary when the environment shifts so rapidly and radically.  Take a walk and try to come up with reasonable responses.
  • Skew is quite low: a rally is far from certain, but at least looks like it's in the cards.

Market Intro

CNBC: 10:25 AM EST

US stocks (SPY, DIA, QQQ, IWM) are trying to hold on after Monday's vicious attack from the bears. Amazon (supposedly) led the fall, but as you'll see below, the devastation for stocks was very widespread; it's difficult to lay blame at any one company's feet.

Asian stocks (EEM, EWJ, FXI, EWY) held on well all things considered. In general, globally speaking stocks are the only asset class that is truly tied up and spun around at present:

Precious metals (GLD, SLV) are retreating as risk-assets try to get their act together (more on this in Thoughts on Volatility). Gold volatility is trading very mid range relative to the last year. For those looking either for a break-down in gold, or the geopolitical situation to further deteriorate, a long position in gold volatility could be a solid play.

Thoughts on Volatility

In keeping with the "Gold VIX" graphic from the intro, TopDown Charts shares insightful perspectives as it relates to the price of gold vs. real yields (inverted right axis for yields). A popular belief holds that as real yields rise, the opportunity cost of owning the metal also rises, which should adversely impact the price.

TopDown Charts shares the following:

To be fair, not all people think about gold in this way. In fact, many people think of gold as a risk hedge (e.g., as I am writing stocks were down -3% today vs. gold up +1.5%), and indeed, probably a big explanation as to why gold has diverged from real yields is hedging demand as investors worry about a potential bear market and heightened geopolitical risks. But even if that is your thinking, the idea of opportunity cost is still relevant, and indeed you might even think of it as simply the cost of hedging (remembering that there is no free lunch in markets!).

This article was written by

The Balance of Trade profile picture
Adam Zingg, CFA offers both practical and theoretical perspectives that will benefit readers who wish to learn more about how to execute  on views or strategies that interest them.  Whatever your overarching philosophy or expertise, I believe there is value in understanding how trading works. This is perhaps especially true for investors, who often take a more philosophical, less mechanical view when it comes to their processes. It is not my goal to:1) convince you which side of the market to be on2) establish your trading time frames3) have you directly follow any specific trade ideasInstead, I aim to demonstrate how complicated sounding ideas can be simplified and accessible.  My hope is to grow your tool kit of resources, and give you healthy confidence to execute your own personalized strategy.  Trading and investment are fascinating, applicable across a wide variety of fields and disciplines.  Greater focus on targeting, execution, and exit strategies build transferable life skills.  In reading my work, it is my goal that you will consistently glean useful insights and build skills that enhance your ability to trade and make important decisions.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

I actively trade the futures and options markets, potentially taking multiple positions on any given day, both long and short. I also hold a more traditional portfolio of stocks and bonds that I do not "trade". I do believe the S&P 500 is priced for poor forward-looking returns over a long timeframe, and so my trading activity centers around a negative delta for hedging purposes.

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