The market’s gotten extremely volatile. So volatile that the Average True Range (ATR), a measure of volatility, on the Nasdaq composite is the highest it has been since the dot-com bubble.
When volatility reaches extremes, it is a sign of market uncertainty.
Investors are scrambling to make sense of the environment. There is great confusion with money managers on how to allocate capital. Money is getting shuffled through this market like a deck of cards.
There are several primary factors stoking the volatility:
I.) Timing Q1 2018 ended last Friday.
End of quarter is always a busy time for money managers. There are many regulatory reporting requirements that must be dealt with. End of quarter is when you see ‘window-dressing’, essentially this is money reallocation. Managers want to maximize returns (and thus fees) for clients and show them that they were invested in the right places at the right time.
For 9 quarters in a row, the S&P posted positive gains. Q1 2018 was the tenth straw that broke the camel’s back. The parabolic march of tax-cut euphoria finally ended with a bang as the S&P ended Q1 18 with a 1.17% loss.
Investors are scrambling to make sense of the environment. There is great confusion with money managers on how to allocate capital. Money is getting shuffled through this market like a deck of cards.
There are several primary factors stoking the volatility:
I.) Timing Q1 2018 ended last Friday.
End of quarter is always a busy time for money managers. There are many regulatory reporting requirements that must be dealt with. End of quarter is when you see ‘window-dressing’, essentially this is money reallocation. Managers want to maximize returns (and thus fees) for clients and show them that they were invested in the right places at the right time.
For 9 quarters in a row, the S&P posted positive gains. Q1 2018 was the tenth straw that broke the camel’s back. The parabolic march of tax-cut euphoria finally ended with a bang as the S&P ended Q1 18 with a 1.17% loss.
II.) ‘Trade War’ Proposed Tariffs on Chinese Imports
On Tuesday April 3rd, the Trump administration said that it will place a 25% tariff on Chinese imports such as flat-screen televisions, medical devices, aircraft parts and batteries, etc.. The proposal outlined more than 1,300 imported goods that will soon face levies as part of a sweeping trade measure aimed at penalizing China for its trade practices.
China responded to this threat by saying that it would impose tariffs of 25% on 106 types of imported U.S. products worth $50B, including soybeans, aircraft, and automobiles.
I am a big proponent of tariffs having outlined the history of trade-restrictions in previous posts. The American middle-class has been gutted, a fact which is impossible to ignore through examination of the rust-belt. It is my opinion that import tariffs will drastically help with the competitiveness of American manufactures and lead to strengthening of the labor force.
While not the least protectionist nation in the world. USA trade-weighted tariffs are among the lowest of developed nations. Push-back by areas such as the EU, Canada, and especially China is quite frankly hypocritical.
On Tuesday April 3rd, the Trump administration said that it will place a 25% tariff on Chinese imports such as flat-screen televisions, medical devices, aircraft parts and batteries, etc.. The proposal outlined more than 1,300 imported goods that will soon face levies as part of a sweeping trade measure aimed at penalizing China for its trade practices.
China responded to this threat by saying that it would impose tariffs of 25% on 106 types of imported U.S. products worth $50B, including soybeans, aircraft, and automobiles.
I am a big proponent of tariffs having outlined the history of trade-restrictions in previous posts. The American middle-class has been gutted, a fact which is impossible to ignore through examination of the rust-belt. It is my opinion that import tariffs will drastically help with the competitiveness of American manufactures and lead to strengthening of the labor force.
While not the least protectionist nation in the world. USA trade-weighted tariffs are among the lowest of developed nations. Push-back by areas such as the EU, Canada, and especially China is quite frankly hypocritical.
| III.) Tech Unraveling De-FAANG’ed The acronym FAANG refers to the companies Facebook (FB), Apple (AAPL), Amazon (AMZN), and Google (GOOG). These behemoths have been on an incredible run for at least the past five years. Indeed, these companies are familiar household names. However, the market capitalizations of these companies have arguably reached an extreme. As of 4/5/2018 combined FAANG capitalization accounted for roughly 36.5% of the entire Nasdaq 100. A glance at the ten-year weekly charts of these companies reveal parabolic moves which very rarely unwind in orderly fashion. |  |
The tech unraveling began with Facebook as the spotlight revealed egregious privacy concerns. Indeed Facebook believes the data of up to 87 million people was improperly shared with the political consultancy Cambridge Analytica. These tech companies are sitting on mountains of personal information and it should not be surprising to see increasing regulatory pressures in the near-future which could put downward pressure on margins.
Amazon was next in the FAANG fire line as president Trump repeatedly lashed out against the company with claims that they were strong-arming the US Postal Service, avoiding paying their fair share of tax, claiming that Washington Post was Jeff Bezos personal propaganda outlet, etc..
The fact of the matter is that Amazon has gotten immensely powerful. Where a decade ago it was Walmart that was the main culprit of disruption, today it is Amazon who is almost single-handedly gutting brick and mortar retail. The company is quickly becoming an all-encompassing monopoly as they expand into grocery, entertainment, cloud-computing, shipping, financial, and almost every other industry imaginable. At some point anti-trust regulations become a serious and valid concern. After all, the last thing we need is for our society to become one giant Amazon network where we are all working and living for the company store.
Strategy Moving Forward
When volatility levels get elevated as they have in recent months often the best strategy is that of sitting on one’s hands. In markets such as these it becomes easy to get carried away, overtrade and get caught on the wrong foot. I suspect that the rotation away from tech is just beginning as money flows towards more ‘safer’ more traditional high-yielding assets in industries that have been overlooked and underappreciate throughout the crazed FAANG era.
As such moving forward, I will keep a diversified and hedged portfolio long value, short FAANG.
When volatility levels get elevated as they have in recent months often the best strategy is that of sitting on one’s hands. In markets such as these it becomes easy to get carried away, overtrade and get caught on the wrong foot. I suspect that the rotation away from tech is just beginning as money flows towards more ‘safer’ more traditional high-yielding assets in industries that have been overlooked and underappreciate throughout the crazed FAANG era.
As such moving forward, I will keep a diversified and hedged portfolio long value, short FAANG.
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