People Doin Stuff….

Today’s Dow gave back a 500+ point rally to close flat, the S&P 500 and the Nasdaq both gave up notable gains, and some, down nearly 1% and 2% respectively. Smallcaps rallied after their muted open, but gave it all back, and some, as well, closing down 1.4%.

I pointed out in this morning’s note that the volatility indices we track were not in the least supportive of this morning’s opening rally. And, boy!, by the end of the day, well, I should say not. The VIX finished the session up nearly 19%, VXN up 18% — that’s a lot! Consequently, in that these volatility metrics reflect the pricing of equity options, our put hedge rallied over 20% in client portfolios this morning, more than offsetting the pain in the broader market. A number of our core portfolio components (7) bucked the tide as well, with silver leading the pack, up 1.7%. 

If today’s late-session selloff surprised you, well, then you haven’t been keeping up with the blog. Not that I’m at all making any prediction(s) — not at all! — just emphasizing that right here our assessment of conditions says risk is very high. You can read that simply as volatility, if you like.

Here’s what I said to the PWA team in our research chatroom this morning, before the market rolled over:

Vol has been issuing a strong warning sign the past few days… vxn is up 10% vix up 7% as I type.. Both averages (Nasdaq and SP500) still green this morning, though not as much as earlier (vol up the whole time)… I sent you guys the chart last week showing how vxn rises with nas right as we peak (much of the time)… ironically, our put hedges are now positive on the morning, despite the market being up… That’s the vol (implied) pricing-in… Now, the way these days tend to shake out, we should look for a push in the last hour/half-hour in either direction…. Vol measures are pricing in some serious potential downside coming… doesn’t mean it’s going to happen… just positioning…. Oh, by the way, the net short spx futures position has all but dried up (that’s less support for the big rallies), and nasdaq longs are net the highest this year (that of course offers zero net short-covering support for nas futures)…. put/call ratio at 50 is dangerous as well…. BOTTOM LINE: The “sentiment” setup is more supportive of a selloff right here than it’s been since before the big selloff…. NOT A PREDICTION, just identifying risk..

Keep in mind folks, as concerned as our commentary herein says we are of late, the Treasury, having amassed $1.6 trillion (way beyond anything previously imagined) in its piggy bank (the Treasury General Account [TGA]), says different… 

Now, make no mistake, all the liquidity in the world does not guarantee that stocks go up. The crowd can, and ultimately does/will,  sell in unison, just as easily as it can buy…

All of it, 100% of it — rallies, selloffs, signals in volatility indices, futures positioning, short interest, retail sales, industrial production, money printing, on and on, is just people doin stuff. Our chief concern as the managers of our clients’ precious fortunes is, are people doin stuff that, in the aggregate, leads to a level of corporate earnings growth that justifies present stock prices? And what does it say about the prospects for other asset classes, like commodities, for example? All else is noise, with a few clues mixed in…

Stay tuned… 


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