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Position Updates
Most of the year and most of the time, investing successfully often requires stringing together a set of little victories over the year (as Fletcher from Porridge would put it).
However, in the last few weeks, we have had an extraordinary set-up for the sharp rise in volatility yesterday and the fall in asset prices.
One look at the financial news - and you’d think this was only about the Fed decision, the hawkish conference, inflation worries, the pivot away from 3-4-5 cuts over 2025….
But - with all corrections in asset prices or even just modest falls of 3-4% as was the case yesterday, this is an opportunity to remember just how modern capital markets work.
Not much has changed since the GFC or indeed since any other modern market collapse. There are layers of investments of various denominations and risk profiles, above and below the cash markets.
The Fed may have disappointed the market, for sure. However, the initial reaction was a relatively mild one, of only a few bps.
Here’s what actually happened, and why yesterday was not just our best trading day of the year - but the most obvious by far.
Around the time of our 12/13th December Newsletter and CNBC appearance, the breadth of the market had continued to narrow hugely. In addition, the cost of portfolio insurance, hedging and/or the cost of making a big downside trading bet on the US stock market, was extremely low - v v v cheap indeed. In fact, much too cheap, given the FOMC event that was around the corner.
We like asymmetric trades. Nominal Downside, Very Attractive Upside.
Separately, and harking back to my earlier point about layers of investments that most Cash Equity Investors, Index Tracker Fund owners and Family Funds rarely watch, it was the derivatives markets that led the way yesterday.
The line in the sand, using options and derivatives modelling tools and other metrics that we (and perhaps others) use to determine not just where supports and resistances lie but also where the vacuum hides, was around 6000 on the S&P 500. A prior level of ~6050 had been briefly tested a day earlier and that was also a golden clue.
Nothing much happened until the S&P broke 6000. After that, the floor fell in and the Dow, S&P 500 and the Nasdaq 100 all posted extremely large and vertical drops from that point onwards. No bounces, no sideways action, no dip buyers - just straight down.
Vacuum.
800 point drop on the Nasdaq, 1200 point drop on the Dow, 180 point drop on the S&P.
30% Unleveraged Profit on the VIX Futures (300% using 10% exchange margin requirements).
185% Move on the VIX Cash Index.
Even if these sorts of trades are not for everyone, the very same tools can inform investors on where their investment risks may lie, when to hedge and when to reduce large positions or diversify.
The S&P 500 has now certainly posted a clean break of a very long upwards trend. If the Index does not reclaim it’s upwardly trajectory within a few trading sessions, we would expect further weakness ahead.
More details to follow - and in the meantime (and just in case things slow down):
Season’s Greetings for the Holiday Season and all the best for 2025 - From your favourite bunch of Philosophers, Physics Nerds and MMA kicky-punchy addicts at Axis….
Typically, precise and timely recommendations for trading positions and investments across asset classes will be in the section below. Please reach out to your usual contact for access.
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