In search of Crisis Alpha for its Clients
August 15, 2020
August 15, 2020
Shortest bull markets in history based
The risk markets are experiencing epileptic seizures. From erratic and violent outbursts up and down and windmill swing of 12% up and 12% down by the Euro/Dollar. We have witnessed the shortest bear market in history lasting five weeks, knocking off 37% in profits from high to low by the S&P. Followed one of the quickest bull markets since the 1930s lasting five months from the low to date and recovering all of the previous bear moving higher by 38% on average, pushing new highs.
And there is more with the great bull run by the gold of 42% in four months followed by a four-day 10% selloff. Contrary Thinker is expecting Bitcoin to be next on the big swing.
Advisors and capital managers are witnessing the most frequent run-ups in long VIX interacting with CB interventionist policy, responding to an economic and financial crisis. The unwinding of the pre-emptive monetary policy will not end well. They never do, and it is merely because there is no way to grow out of this amount of debt.
According to Ray Dalio, there are seven factors that the trained eye can see that rings the bell for a pending bubble ready to burst at the most straightforward outside event. Here is the checklist allowing you to check off on all the reasons WHY the markets should go into a bear market – both bonds and risk assets, if there is a difference anymore.
1) Prices are high relative to traditional measures. I would make this measure relative to your method of determining what is HIGH, and I would include extended in time.
2) Are markets discounting future rapid price appreciation from these high levels? The expected return is purported to be high.
3) There is a broad bullish sentiment. That most bull/bear polls and measures of bullish and bearish activity.
4) Purchases are being financed by high leverage, like ratios of margin debt to finance the purchase risk assets.
5) Buyers have made exceptionally extended forward purchases (e.g., built inventory, contracted for supplies, etc.) to speculate or to protect themselves against future price gains.
6) New buyers in the risk markets, to be precise to see publicly touted as the bullish new entry of investors/traders who were not previously in the market.
7) Simulative monetary (and fiscal) policy threatens to inflate the bubble even more where the tight policy will cause the popping of the bubble.
Ray provides a list of tables of countries and eras where the above series of factors preceded notable financial and economic bust that most market professionals like yourself will recognize.
If you see five of six of the seven manifesting today, that suggests more than crisis management, but opportunity management. What Country Thinker is in search of is Crisis Alpha for its clients. What is essential to professional advisors and managers is the engagement of an uncorrelated return stream that balances the risk and reward of a traditional portfolio. That return stream would improve the return of the portfolio no matter its style from high beta to stock/leveraged bonds.
Contrary Thinker’s goal is to provide return without the constant negative carry that is associated with traditional hedging. To be clear without always being engaged in a hedge or portfolio insurance. This approach is going to provide the manager and professional advisors with his best returns when the market turns bearish or crashes.
There are two types of long volatility to do the job. Capturing increased perceived fear that is associated with bear markets like the first quarter of 2020, and the other is the regular volatility spikes that mean revert in the bull market, like the first quarter of 2018. This nuance is lost on many, but Contrary Thinker has a comprehensive model that is designed to capture the known unknown risk like the WFC or the pandemic crisis in 2020. It is also intended to foresee Black Swans, the unknown unknowns like the bull market in VX, from the terrorist attack on 9/11.
Please, we are not “Swamis,” full stop. Instead, Country Thinker’s model allows it to predict FORM without knowing what the substantive event might be that will trigger the change from short volatility to long.
To be clear what Country Thinker is suggesting the use of timing for the engagement of hedging strategies that take full advantage of swing trades in long volatility funds and the use of mathematical strategies applied to the VX futures. These similar systems evolved from Turtle Trend Following formulas with the same contract sizing strategies, easy to understand, and observe.
As a full-service advisor and model/strategy developer, we do the more manageable bits of finding bottoms and sorting out the relative strength of sectors and new idea stocks. But since 1980, I developed a talent for picking tops, starting with the big top in SA gold miners through today’s gold/silver market, and there is more to come looking into 2021.
If you are not a member yet, one thing you will know with Contrary Thinker: there will be no equivocations.
With higher confidence in what Contrary Thinker provides,
here are four good reasons you should become a fee-paying member:
Less concern about risk assessment with better timing
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Great and Many Thanks,
Jack F. Cahn, CMT
A Thinking Man’s Trader Since 1989,
Contrary Thinker 1775 E Palm Canyon Drive, Suite 110- box 176 Palm Springs, CA 92264 USA. 800-6183820 or 25/1 Poinsettia Court Mooloolaba, QLD Australia 4557 614-2811-9889
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