Witnessing Window Dressing as the Quarter Ends

The stock market got what it wanted yesterday from Fed Chair Janet Yellen. Interest rate hikes are on hold and the reason is global uncertainty. Given the fragility of the world economy, the risk of raising rates and a strong dollar is just too high right now.

Markets soared here in the United States on the dovish statement. This was just what we were worried about last week when we added our volatility position and small-cap short.

Thus, we did not add options, which would have worked against us with respect to both price and decay. However, this rally is providing us with a great entry point as volatility is coming in and complacency is creeping into the markets.

There is an age-old occurrence on Wall Street called window dressing. This is when portfolio managers of mutual funds, pension plans and hedge funds purchase the best stocks to show investors in their quarterly reports. This ends tomorrow with the first quarter’s end. The markets are overextended and we still believe the next move is down. We plan on adding options to our exchange-traded fund (ETF) trades later this week, so be on the lookout for a special alert from us. When the markets correct, bonds, gold and stocks should decline and volatility should rise — boosting all of our portfolio holdings.

We currently hold the ProShares Ultra VIX Short-Term Futures ETF (UVXY) and the ProShares UltraShort Russell 2000 Fund (TWM). Both are designed to benefit from a declining market. The markets, by some measures, are overly bullish, so these remain buys as we continue to see a market decline in the weeks ahead. Our put options positions in the Market Vectors Gold Miners ETF (GDX) and iShares 20+ Year Treasury Bond ETF (TLT) are getting a boost this morning. However, we realize time decay is working against us. We will continue to monitor these options and look for an opportunistic sell point.

Note: the options are holds and the ETFs are buys.