“Hope for the Best but Prepare for the Worst”. We have all heard that, right. Your Mom or Dad might have told you that in the context of being responsible and taking care of yourself. Investors seem to have forgotten that adage. Going into last week we were experiencing the longest period of compaction in the stock market since 1928. When the market breaks out of areas of high compaction we generally see very large, often violent moves. But on Thursday, August 20th the CBOE Volatility Index, or volatility index (often referred to as the fear index) sat at a near historic low of 20. Apparently no one was worried. The thinking, I suppose, is that the Central Banks of the world will successfully navigate the treacherous waters of enormous sovereign debt, a slowing global economy, an unstable inflation expectation and US economy struggling with the prospect of monetary tightening.
But last Monday it all suddenly came unglued. On Black Monday, August 24th, stocks worldwide cratered in one of the largest one day drops in market history. Only to be topped by Thursday which saw the largest single up day in market history. At the end of the week, the market was fractionally higher and closed right on the 10 day moving average. The Bulls will tell you that was a much needed correction and the market is now ready to move higher. The Bears will tell you that the back of the bull is broken and we will see as market that will make 2008 look like a cake walk. Both sides make strong arguments. Which should you believe? Neither. It is surprise information that often moves markets sharply higher or lower. You can’t know a surprise in advance.
At Walsh Asset Management we are not predictive. We are reactive. We recommend strategies that identify developing trends to enter new trades, which use good money management to cut losses short and let profits run. Managed futures are one of the only asset class that made money in 1987, 1990, 2001 and 2008. Specifically, trend-following managed futures are a long volatility investment. The stock market generally does very poorly in higher volatility. The managed futures Index has consistently out-performed the S&P 500 since 1980 expect for 2001 right before the break, in 2008 right before the break and right now.
Source: CME Group (NASDAQ:CME)