Market questions and some answers too
Stocks are up again today, with the major indices again hitting new all-time highs. All those worries from the Brexit crash or last February’s crash or from that crash last summer that bottomed with the $DJIA -1000 in one morning session seem faint and quaint at this point, don’t they?
Do you remember how had it was to be bullish at the bottom of each of those events? We’ve been navigating these markets well and prepared for exactly this action. That’s great and we have a lot to be proud of, especially when you look at the carnage in the hedge fund sector and at all the bears/shorts who have missed and/or lost huge money in this Bubble-Blowing Bull Market. But what about now? Can the markets continue this relentless climb higher? Do stocks need to rest, consolidate and/or pullback? What about crashes, could the market crash just about the time the shorts/hedge funds/bears give up the ghost?
There are no easy answers of course. But we can remain objective and smart about how and when we trade/invest.
Here’s a back and forth from this weekend that I had with a very smart hedge fund manager in which we try to answer these questions.
HF: As the Bears post Brexit have been squashed (again) do we look at this new normal of a almost 10 handle on the VIX as a harbinger that somethings not right?Me: I never like to assume a new normal, but they do happen….is this an example of a new normal…maybe for a few months or even quarters, but probably not forever…we’ll see a 40 and 50 VIX again in the next few years, I believe.HF: Or do we embrace these daily setups until they don’t work any longerMe: This has certainly been the right strategy since Brexit and as long as we can be flexible enough to change our stance, why not ride it til it breaks?HF: The trader in me (my only being) tells me to continue to press the button for the near term.Me: How long do we stay at the table? See above, perhaps until we lose a couple hands and not before then?
HF: Sure I want protection for a portfolio (and the premiums are more then fair) but does the act of protecting change my psyche on a higher high happening?
Me: I’ve been starting to protect my portfolio, but it doesn’t change the fact I still think we are in for another major leg higher in the tech specifically and US stocks generally over the next year or two at least.HF: Europe is on vacation for 40 days…the Fed can’t hurt us..earnings are over….employment is great…is the election really going to be that uncertain?Me: Maybe all that stuff has been priced in already…sell to the sound of trumpets, perhaps those things you list and the stock prices already are the trumpets to sell to?HF: I think the Mutual Fund redemptions post Brexit have also put stocks in good hands, and a continued rally possibility should not be ignored.Me. This is a really good point that I hadn’t pondered well, and I’d mentioned that Hedge Funds are also seeing major redemptionsHF: I believe looking for a reason to sell this market is a weaker plan than finding a reason to own it.Me: Interesting phrasing.HF: A Hillary year end rally? Say it isn’t so.
Me: I do think Hillary will be well received by the market and that Trump will scared the market, but what happens if Trump starts leading the polls in the next month?HF: I think the best protection.are puts on the S&P 3 months out. Not betting the farm on this (yet ). Unsure when to buy as well.Me: I’ve been slowly starting to buy some QQQ, IBB, DJIA dated out to November and December, and I’ll be adding slowly to those puts in weeks ahead and probably add some SPY puts too.
