Volatility Reports the Big Picture

May 8, 2023

Volatility Reports the Big Picture

Volatility Reports the Big Picture.

What has happened after all the crashes and bear markets since 1987 is the increased interest in portfolio insurance. That is an industrialized term for various ways to protect your investment portfolio against losses. Trend following systems do the same thing because they go long in up trends and add on the way and short in down trends adding on the way down. In fact, long put option programs are advertised as insurance against market declines and program trading of puts is portfolio insurance.

The waning of interest in portfolio insurance (aka hedges) is related to the distance between the most recent bear market/crash events and the peak of a current bull market. At least and until next bear market has done its damage.

Like almost all forms of portfolio it has nothing to do with the valuations of equities. Because they are all price-driven, based on technical factors. Like all priced based forms of portfolio insurance, dynamic trend following is driven by market direction signals (e.g., MA crosses.) They are similar to the Algos, and program trading used in 1987 that offset the massive loss of profits for the few who were ahead of the curve. Ironically, after October 19 program trading was blamed for the crash.

All of which in rational terms leads me to a major question…

With the state provision of insurance, which all started with the Greenspan put in 1987, is their anyway to justify market values at any level, not to mention the current one after a 13 year advance pushed in the last 3 years by pandemic induced QE? A QE that had nothing to do with values and everything to do with major market intervention.

While it is wholly a socially acceptable notion to have equity risk insurance provisioned like unemployment or other entitlement programs, the latter has always helped people. But what happens if the insurance does not work next time. Feature this, the bitcoin industry goes bankrupt. Will the Fed insure all or any of the diverse vested interest from brokers to miners and holders these risk assets from losing funds over 200k when they crash again?

What is the real value of Bitcoin? Bitcoin reflects the attitude of risk takers, as an investment/trading vehicle it has no intrinsic value, only what the market will bear. Furthermore. few merchants want wild swings in their currency of trade. As a primary indicator of speculators’ confidence, it will not lag the Dow & Co into the next downturn.

Did the market produce its “Abbey Road” on Friday?

The market can’t have it both ways, it’s not rational. The only reward that emotional investing receives is volatility. From the start of the late inflationary cycle, it was good according to the bulls, until the Fed used that as their basis for hiking rates, at which time the bulls sustained focusing rather on the USD index being below 103, a risk on signal. But now with inflation seemingly under control, that’s bullish also and add to that a booming economy as last Friday revealed, the market ignores any negative issues gaps higher on the open rallies 500 points early and holds that gain into the close.

Yes, Friday was a surprise. According to the Bureau of Labor Statistics, the unemployment rate was 3.4% lower than the expected 3.6%, tied for the lowest level since 1969 coincidentally a hallmark year for the Dow. It was its second attempt at breaking out above 1000 and failed. It was not until its 6^th attempt at the break did the market succeed from 1966 to 1982.

As a guideline market do not top make major high pivots on bad news. Rather major reversal happens on good news or no news when the media and the pundits on the floor do not expect and do not shift their sentiment until a few AOD declines happen.

Scenario and Bottom Line

Longer-term members would confirm that the COT dates hit all the markets in the same time window within a band of a few days. In a series if you will. I will strongly suggest you do not get caught up in the most recent correlations like the “bullet proof portfolio mix of 40% bonds and 60% equities.

Bonds will not be a hedge; they will continue to relate in the same fashion seen the first half of 2022.

The most recent highs hit and reversed at the long-term descending channel line from the highs made in March 2020.

Add to that the FIVE high pivots at 134 by the bonds and notes. The primary cycle has topped. The 6^th attempt came up well short of the 134 price and has tumbled since with the support of TEM on a rule #2.