Expect High Volatility as Large Players Volley for Value

02/16/2018 3:30 pm EST

Focus: MARKETS

Nell Sloane

Principal, Capital Trading Group

Great traders and true value investors know that it’s not only the return function that dictates long term success but where and when you begin to buy makes all the difference writes, Nell Sloane of Capital Trading Group.

So, are you going to mess with four decades of consistency?

Has the bond bear left the building? You have two choices, fight a trend that has been in place for nearly four decades and bet that nothing has changed or realize that in the short run, perhaps risk isn’t such a good thing at this point and that the bond markets are telling us something very important.

Now we aren’t in the camp that rates can necessarily rise, but we aren’t naïve either. We had a conversation recently with an investor asking about the recent moves. In particular, the question was about market timing and if it’s worth it to get out and get back in.

We said: think of it this way, not in regards to timing, but rather think in percentages. You are 100% invested and you have gone along for the QE ride this whole time. If the markets fall 25% you have to make 33.3% just to get back to where you were prior.

Now we don’t know if the average investor realizes that in a rational market, 33.3% returns aren’t a given, nor should they be considered normal. So basically, we said, what’s your time worth vs. speculating on further upside without central bank support?

Will it hurt you to pull some chips off the table and move to a 30% cash defensive position? Certainly not, in fact, we think it’s prudent depending upon one’s given situation. Now, of course, everyone’s risk tolerances and overall portfolios are different. We are merely talking common investing habits that make good economic sense to us.

What is our overall takeaway from all this recent action? We will continue to expect volatility to be high as the overall large player flows continue to volley for value.

We expect that the recent sell-off has given us a tradable new range and that there are both very large fundamental buyers as well as very large fundamental value sellers.

We continue to expect corps to be large supporters and buy back equity, pensions and insurers to support on pullback for value and trend following, risk parity players to sell on rallies.


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All in all, this should make for some decent two-way flows. That’s the biggest takeaway we want our readers to understand is that financial markets ebb and flow. That is their true nature.

We don’t expect a massive washout to occur all at once, in fact, the central banks would never stand for it. They will and have backstopped the markets since the late 1980s and probably longer in some way or another. This time is no different. Far too much is at stake and considering the entire world is financialized, the stakes are bigger and continue to get larger as the days go on.

Finally, we will decidedly end with our reaffirmation of the growing need for alternative strategies.

We would like to think that our alternative view on markets is consistent with our preference for alternative risk and alpha driven strategies.

Alternatives offer the investor a unique a unique opportunity at non-correlated returns and overall risk diversification. We believe combining traditional strategies with an alternative solution gives an investor a well-rounded approach to managing their long term portfolio.

With the growing concentration of risk involved in passive index funds, with newly created artificial intelligence led investing and overall market illiquidity in times of market stress, alternatives can offset some of these risks.

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