While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to a six-month time frame, Mad Day Trader, provided by Bill Davis, will exploit money-making opportunities over a brief ten minute to three-day window. It is ideally suited for day traders, but can also be used by long-term investors to improve market timing for entry and exit points. Read more
Global Market Comments
October 7, 2020
Fiat Lux
Featured Trade:
(THE ROARING TWENTIES HAVE JUST BEGUN),
(SPY), (TLT), (TBT), (VIX)
I just about fell out of my chair when the national election poll numbers were released over the weekend.
After remaining stuck at a 49% to 41% lead for the past year, Joe Biden picked up 5% to reach a commanding 54% to 39% lead. These are the most decisive polling numbers since the 1972 Nixon-McGovern contest, when the former carried 49 states in the Electoral College.
A blue wave is now a certainty, where the democratic party gains control of the White House and Congress for at least the next two years.
The enormous swing is no doubt a response to the president’s performance at last week’s debate, which most viewers found wanting. We now know that he was infected with Covid-19 at the time, which among its many symptoms include delusion and poor decision-making.
We don’t know Trump’s academic record because he has sued his alma mater to prevent their release. However, it is safe to say he failed his debate class. You never attack the moderator.
The change in the election outlook has enormous implications for investors. It puts to rest and chance of a Trump win or a contested election. Biden’s lead is now so enormous that it is impossible to overturn through legal challenges, widespread voter suppression, or disabling of the US Post Office.
Differences in vote counts in the hundreds, as we saw in Florida in 2000, are fertile ground for challenges, extended outcomes, and uncertainty. Differences in the tens or hundreds of thousands aren’t.
Don’t take my word for it, listen to Mr. Market. The near three-point plunge in the bond market (TLT) yesterday tells us that good times are coming, demand for new funds will be unprecedented, and interest rates will rise. 2021 could see an unprecedented 10% US GDP growth rate.
As a result, the stock market now has before it the task of backing out a lot of fear and uncertainty that was priced in. Translation: stocks go up.
Horrendous multi thousand-point plunges are now a thing of the past. It is now unlikely that the S&P 500 (SPY) will even fall back to the 200-day moving average at $308, a near certainty only a week ago.
It’s time for you to step up your aggressiveness in returning to risk in general and the stock market specifically. We are about to see another tidal wave of cash to move into technology stocks. Rapid rotation into domestic recovery stocks, banks, and small caps will also ensue.
Your next entry point on the long side will be next Monday after Trump returns to the hospital as his Covid-19 peaks. That is supposed to be what happens 7-10 days after an initial infection. That should be worth 500 or a thousand points of downside.
The Roaring Twenties have just begun, if they hadn’t already last March. My forecast of another 400% gain over the next decade on top of the existing one just received another dollop of credibility.
Oh yes, and don’t forget to vote.
“Be polite, be professional, but have a plan to kill everybody you meet,” said General James Mattis, former US secretary of defense.
I would like to make a suggestion on a covered call.
And the stock is Box, Inc. (BOX). BOX doesn't report until November 24th.
I am going to suggest you buy the stock and sell the October monthly call option against the position.
BOX is trading around $17.65 as I write this. My suggestion is to buy BOX at the market.
Then Sell to Open (1) October $18 for every 100 shares you buy.
You should be able to sell them for 40 cents each.
Based on the nominal portfolio, limit the trade to 400 shares or 7% of the tracking portfolio.
If the calls are assigned next Friday, the return will be about 4.2% for 8 days.
Global Market Comments
October 6, 2020
Fiat Lux
Featured Trade:
(HOW THE RISK PARITY TRADERS ARE RUINING EVERYTHING!),
(VIX), (SPY), (TLT),
(TESTIMONIAL)
I received a call from a hedge fund manager on Friday warning me of what was about to hit the market.
So much money had poured into "risk parity” strategies that it was starting a long-term secular trend up in market volatility (VIX). It was a classic case of too many people bunching up at one end of the canoe.
Witness last week’s failure of stimulus talks on every front. Even though stocks kept going up, the Volatility Index did, too. That is never a good sign.
Investment advisors everywhere are bemoaning the shenanigans of high-frequency traders, offshore hedge funds, and congress for the recent volatility of the market that has been scaring the living daylights out of their clients.
But they have a new enemy that few outside the trading community are aware of: "Risk Parity" managers.
Risk parity is being blamed for the September explosion of volatility that took it from 22% to 36% in a matter of days.
The industry is thought to have $400 billion to $600 billion in assets under management now, with hedge funds Bridgewater and AQR in the lead.
Potentially, they could unload as much as $100 billion worth of stocks in days.
What's more, the fun and games aren't confined to just equities. Risk parity strategies have spread like a pandemic virus to bonds (TLT), foreign exchanges, commodities, and even precious metals.
Risk Parity is an esoteric new investment strategy that targets a specific volatility level, rather than a return relative to a convention benchmark such as Treasury bonds or the S&P 500 (SPY).
When volatility (VIX) is low, they add risk, hoping to beat the returns of competitors. When volatility is high, they cut back positions, hoping they miss the losses of others.
The goal is to come out on top of the money manager league tables, sucking in tons of new assets and countless riches in management fees.
You can see right now where this is going.
In rising markets, they increase buying, and in falling ones, they greatly step up selling.
I'm sure there was a day several years ago when this approach made money hand over fist.
That was probably back when only its inventor was implementing it alone in a back room using an undisclosed hedge fund with a tiny amount of capital.
The problem with risk parity and all other strategies of its ilk is that they become victims of their own success. New capital pours in, returns fall until they inevitably dive into negative numbers.
I have seen this occur time and again, from the portfolio insurance of the 1980s (think October 1987 when the Dow plunged 20% in a single day), to Japanese warrant arbitrage, to high-frequency trading and the flash crashes.
The proof is in the pudding.
An index of 17 risk parity funds tracked by JP Morgan has fallen by 8.2% since the beginning of May. More losses are to come. It sounds like the great unwind of risk parity assets has already started.
Like all investment fads that promise great, risk-free returns, this one will come and go.
In the meantime, fasten your seat belt.
I am constantly puzzling over what to say in a testimonial for the Mad Hedge Fund Trader. There are so many elements to the service. Traders and fund managers can vary so much in their style and experience.
This is my 5th year of MHFT/MDT subscription. After a few ups and downs, making most of the newbie mistakes, getting on top of time zones at different times of the year, I have settled to a very good consistency and returns with the service.
Perhaps the most important lesson I have learned is that when John and Bill say “buy,” that does not mean “buy right now.” Trading skills are still essential. The combination of John’s fundamentals on sectors and individual stocks combined with Bill’s technical approach is just unbeatable.
Malcolm,
Tasmania, Australia
In terms of the stock market, “A vaccine is more important than the stimulus,” said David Kostin, chief equity strategist at Goldman Sachs.
Mad Hedge Biotech & Healthcare Letter
October 6, 2020
Fiat Lux
FEATURED TRADE:
(CAN THIS DIVIDEND KING BE THE NEXT VACCINE KING?)
(JNJ), (MRNA), (PFE), (BNTX), (AZN), (INO), (NVAX), (SNY)
