TODAY’S THOUGHTS: VOLATILITY IS A TWO WAY STREET
A news driven spin cycle driven by indecisive European finance ministers that detest United States monetary policy but increasingly find themselves with no other choice but to follow the path of the hated one. Of course, with such a description of our latest crisis situation one would expect volatility to become the rule rather than the exception.
I have been bullish on US equities since September 6th. My view hasn't changed despite the volatility. At the same time, the volatility is the reason I have been reluctant to initiate a position in any equity related ETFs. I am having a difficult time measuring my risk in this range. It has become a trading range that is simply too wide to be able to exercise proper risk control without either (1) getting stopped out prematurely (2) giving up too much equity to ride out the volatility (3) putting on a position that is too small to matter.
I continue to believe that the best way to play a return to equities in the coming weeks and possibly months is through a "risk amplification" trade that puts together a basket of assets that will benefit from the unwinding of risk aversion. My favorite being short the long end of the curve. Shorting gold is another favorite. And being short the Euro is one I've had since August. Although that is more a macro play on an intermediate term trend towards the US Dollar regaining reserve currency status.
With respect to the action today: I wasn't really surprised by any of it. You know you are facing difficult conditions when a 200 point downswing on the Dow to start your Monday morning becomes a typical start to the week.
The last hour of trading exhibited in a monochromatic light the exact change of behavior I had outlined in my article over the weekend. The difficult month of August and first part of September saw 150+ point down days, invariably continue their momentum to the downside during the final hour of trading. Today we saw the reverse effect, with the markets attempting to take back all of the losses, and the QQQ/Nasdaq Comp (important market leaders) nearly finishing green on the day.
At present, futures are wildly volatile once again overnight on news of S&P downgrading Italian debt. Same old European saga in a bucket of molasses waiting for Grandpa Gurt to kick it over and set the rodents free.
We are quickly approaching a point where Italy, Greece, France and Germany will be put in the rear view and the spectacle of outstanding strength for the earnings of corporate America, especially technology, will become the focus. Prepare accordingly.
