“If it trades like a bull market, it’s a bull market.” Colm O’Shea
Markets had a risk-on week. Jay Powell came out swinging with a 50 bps cut that he insisted wasn't due to economic weakness but rather to defend a strong economy. The markets liked what they heard and expect more cuts this year. It's very hard to not see Powell's actions and words as incredibly bullish and that's what led to a big rally this week.
More than just the psychological effect of having a Fed not trying to crimp economic activity anymore, the additional security that, in an adverse event, the Fed could rapidly cut and has much room to do so is also reassuring. Under the market's hood, the only two sectors that didn't gain were defensive.
Of course, much analysis tells you we are in for some seasonal volatility, and the history does imply that it is likely. However, seeing a market as strong allows you to see through as it will be to the positive Q4 seasonals that will follow any October bumpiness. Of course, we have a Presidential election, a source of persistent uncertainty. But even here, the odds are rising of an incumbent victory and that outcome suggests lower volatility then the alternative. The VIX dropped into the $15 handle yesterday, before settling in the low $16's.
But overall, there are solid underpinnings to a resilient post-pandemic economy. Recession doesn't seem imminent. The Dow just hit an all-time high, and the S&P 500 likely won't be far behind it. There has been a healthy rotation from the market's darlings in Technology/Semis into more old and real economy companies that have lagged the rally earlier in the year.
As the opening quote says, if it acts like a bull market, then its a bull market. And that's what we're in, folks. That doesn't mean there won't be fear-induced drops. But they will be opportunities. Keep Christmas and Santa on the mind during Halloween and your returns will likely be quite jolly. There are always drops and fear in bull markets. There are always a lot of all time highs, too! Contrary to what many may think, all-time highs are generally fortuitous for markets. The all-time highs in the Dow are decidedly positive for the economy. Gas prices are low, inflation expectations are low, and mortgage rates will be going down as well.
Contrary to a lot of people's intuitive notion is the fact that all-time highs are not a good time to sell but rather a good time to buy. There's a lot of ways to beat the market in the short-term. No one will deny that it is possible to beat the market over tactical time horizons. One of the ways we repeatedly do it is by taking advantage of the variance premium, or the fact that implied volatility usually exceeds realized volatility. But one thing we can always make money from is the false beliefs and cognitive bias of the crowd. In ultra-thin derivatives markets that could hardly be considered efficient by anyone's measures, the opportunities for alpha are ripe for the plucking.
This was the rationale behind some of our recent VIX shorts. Volatility has collapsed since the spike earlier in September. Of course, there could be a typical uptick in October, but we saw a little seasonal window to get a VIX short in and it has worked out well. We also have a longer term $TLT long that acts as a tactical hedge and performed splendidly during the recent September bout of volatility. This position is meant for the long term and will act as a counter balance to some of our riskier trades.
Seasonality can be scary and a lot of investors have traumatic memories associated with the late September/early October period. But it's important to remember that temporary volatility does not mean that we have a repeat of the Global Financial Crisis on our hand. You can load up with long volatility instruments to help soften the blow, and maintain a bullish disposition long term.
There are ways to take analysis beyond seasonality as well. I worked at Fundstrat Global Advisors, which I consider to be the best research shop on Wall Street. I think my old boss, Tom Lee, has repeatedly made mincemeat of the bulge bracket analysts time and time again in the post-COVID cycle and part of the way I know he does it is simply by examining the evidence with a cool head. If you look at equity performance over the three-month time period following a Fed cut, it should make your Halloween frights wither away.
There is a permanent fright committee on part of Wall Street: the permabears. They will turn any piece of information into something scary and twist it around. I saw recently people complaining about rising consumer delinquency in credit cards. Yes, that may be occurring, but when you compare this trend to historical trends, you can see that the disposition of the American consumer remains strong along a longer arc.
Strong markets stay strong, and the market we are in is acting decidedly like a bull market. But at Punk Rock Traders, we have also monetized some of the temporary volatility giving us fresh powder to load up on the dips. Don't believe the fear industrial complex though. You have the ability to buy instruments to assuage your fear and continue to participate in this strong bull market. Punk Rock Traders is honored to help you achieve this.
