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YTD Performance

As we sail past the half way point of the year I thought I look in the rear view mirror might be interesting to see how a few select markets have performed. There are no prizes for guessing that the local market has been shit.

ytd

 

Once Upon A Time

Sometimes I feel sorry for traders/investors who need to construct a narrative as part of their investment process. Whilst you are cocooned inside your own delusional story you would never know whether your story is the right one and is the one the market has chosen. As an example consider the year to date moves of various indices from around the world.

Index Performance YTD

As might be expected there are a range of performances but what is interesting to me is that if you look at the US markets in isolation you see something interesting. The Russell 3000 and S&P500 are doing better than the benchmark index. This positive performance seems quite obvious when you drop in the performance of the VIX – the so called fear index.

Index Performance_VIX

The VIX has had a somewhat precipitous drop since the beginning of the year. As such the narrative could go volatility (uncertainty) has leaked out of the system therefore investors feel more comfortable with equities. Sounds reasonable, however, there is always someone who will spoil a good story. Consider the chart below  is of the ETF GLD and the Dow since the US election in November. GLD tracks the spot price of gold so it serves as a useful proxy.

Dow_GLD Since Election

Throughout November the gap in performance between the Dow and GLD widened – this would fit our existing narrative of the market being more settled therefore there is no need to set in place a hedge via gold. However , this story starts to change as Trumps profound lack of suitability as President  becomes obvious and the performance gap narrows. If we shrink the time frame down to YTD only then the Trump idiot premium widens.

Dow GLD YTD

All of a sudden we have a wrinkle in our narrative. The original narrative was uncertainty has left the system, investors are happy and buying equities but hang on the performance of gold which is traditionally seen as a hedge instrument is improving. WTF is going on?

This is the issue with narratives they are simply stories designed to make us feel better about our decisions as such they are equal parts post-dictive error, self justification  and comfort food. Hence, they are largely meaningless.

 

Well Here It Comes

In line with the notion of January predicts the direction if the not the quanta of the year ahead here is a rundown of the January gains or losses for various markets. Make of it what you will….if anything…..

January

What is more interesting to me is what I perceive to be a dislocation between perception and reality. The market commentary I have had the misfortune to hear lately has spoken about the sudden rise in volatility in the market. The basis for this judgement has been a bit of a jump in the VIX over the last trading period. Of course completely ignoring the fact that the VIX has been meandering around at historically low levels for the past three months. It is worth noting what the VIX measures before assigning any weight to it.

According to CBOE’s marketing blurb –

The CBOE Volatility Index® (VIX® Index) is a leading measure of market expectations of near-term volatility conveyed by S&P 500 Index (SPX) option prices. With the introduction of the VIX® Index in 1993, followed by the launch of trading of VIX futures at CBOE Futures Exchange (CFE) in 2004 and VIX options at CBOE in 2006, there has been a growing acceptance of trading VIX and VIX-linked products as risk management tools.

VIX options and futures enable investors to trade volatility independent of the direction or the level of stock prices. Whether an investor’s outlook on the market is bullish, bearish or somewhere in between — VIX options and futures can provide the ability to diversify a portfolio or hedge, mitigate or capitalize on broad market volatility.

That is the VIX is a measure of other peoples perception, granted this is arrived at by looking at changes in volatility expectations implicit within options pricing. So the VIX really doesn’t measure market expectations and hence one of the major criticisms I have of it. It is simpler to default to actually looking at what the current historical volatility of an instrument is.

DJHV

This is the Dow with a simple 15 day historical volatility plotted and as you can see since July of last year the peaks in volatility have been dropping and the post electio bump has been a time of very stable volatility.

Index Correlations

For my own curiosity I decided to have a quick look at the price correlations of a handful of world indices. Those correlations that are below 0.5 I have coloured red.

Index Correlations

As expected most share a positive correlation with the only true diversification coming from the Shanghai Composite. This does pose a conundrum for index traders since it causes difficulties with diversification in the traditional sense. However,these are price correlations not return correlations. If I get some time I will redo this as returns table and see what the difference is.

BREXIT – Hard Exit

Apparently this is what a hard exit looks like.

gbp_eur gbp_usd gbp_aud 100

For the FTSE it seems to be a case of coming home and finding all your stuff on the front lawn….

No Man Is An Island

So said John Donne and the same is true of markets. One of the most fascinating features of trading is that markets at times they display interesting interrelationships and that these relationships tell you something about the underlying emotional state of the market. Below are three markets I am currently involved in and all seem at this point in time to be telling a story about how the market is currently coping with a President – Elect who seems to have the IQ of a trout and the stability of a slinky falling down Mt Everest.

Markets

As  personal disclaimer I am currently long gold, short the USD in various iterations and my short term Dow system just threw me out from my last long position. So this is my story so it reflects my internal bias. What is interesting is that the Dow didn’t power through 20,000. I remember when it hit other “significant” numbers and it just burst straight through – there was no prevarication or hesitation. Yet at the same time the Dow paused gold began to move up and the USD Index began to move down. Whilst is is interesting to try an assemble a narrative from this – it is easier to simply trade the charts and let others build a narrative as to what they mean.

As a final point it is worth looking at how a few major markets have performed YTD – as you can see precious metals seem to be doing a fair bit of heavy lifting.

YTD

 

FTSE 100 All Time High

It is interesting to note that the FTSE 100 has made a new all time high (yet another market doing better than our own). The FTSE presents an interesting lesson in how markets can behave and how long it can take for a market to recover. The FTSE made a new all time highest close in December 1999 but it didn’t breach that mark for another 15 years when it briefly flirted with new highs for a few weeks before falling again.  It then took 9 months to recover to the new highest close. What is interesting is the amount of time it took to move beyond the 1999 mark. This has undoubted implications for index traders, particularly those who buy ETF’s. Index ETFs have a few strong selling points – you will generally always beat active managers over the long term and you will do so at very low cost.  However, it can be a long time between drinks if the index decides to go nowhere for decades.

It will be interesting to see if participants hold their nerve.

100 dd

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