Out Like a Lamb and in Like a Lion?

It should be no surprise to market watchers that volatility has been on vacation for the last couple of months.

If fact, as of last week, the S&P 500 has traded higher or lower more than 1% in just one of the last 35 trading days. To put this in perspective, the S&P 500 traded higher or lower more than 1% in 30 of the first 35 trading days of the year.

Moreover, the VIX volatility index has traded below its 50-day moving average for a similar period of time. One might say it’s coiled up like a spring ready to pop.

Now cue the seasonally disruptive month of September. Over the last five full calendar years, September has posted an average loss greater than 1% over a time when the index as a whole has returned more than 60%.

Suffice it to say that September hasn’t played well in the sandbox when it comes to overall contribution to positive returns. Now taken together, this situation doesn’t mean we are poised for an imminent and massive drop in the markets, but it does mean that we are ripe for a return in volatility.

As a result of the last options expiry cycle, we are short some indices, remain long in volatility and are positioned well to profit from volatility’s return. While we are writing this alert, the market is slipping on this last trading day of August. I am reminded of the saying that things happen slowly, then all of a sudden. We continue to stay long in volatility and look to exit at profitable levels and shift gears when appropriate.

Sincerely,


Doug and Tom