shapecharge
Friday’s market action certainly hurt a bit. The big rally off the lows in June was a bit of a head-scratcher unless you knew where to look. We were looking at the options market, the technical levels of the market and at systematic strategies. The head-scratcher part is usually the systematic strategies. They are price-agnostic. They just keep buying or they just keep selling. They don’t care about price. Well, they are back to selling. Another price-agnostic strategy is the corporate buyback. As we enter the always rocky month of September, those buybacks go dark around the 15th of the month. They enter their blackout period because corporate earnings are about to start. We are also back to negative gamma. Things could get very rocky, as Friday was as ugly as it gets and many were caught wrong-footed. We are very happy we have been taking off risk.
Why not sell it all? I had a client ask this question this week. We believed that the market was going to run into trouble, and we were right. Investing is not a game of right and wrong, it is more of a game of probability. We thought there was a high probability that the market would turn lower, so we hedged our bets and took some risk off. We didn’t know that the market was going to turn lower. Big difference. We are as underweight equities as we have ever been with very high cash balances. At least we are now getting a return for our cash around 2.25%. We haven’t seen that in a decade.
This is the third wave down in a bear market. The 3rd wave is usually the most severe, the sharpest and the quickest. Let’s see how Monday turns out. We would consider cutting our exposure further for our most risk-averse clients. Understand that the real money to be made here is missing some or most of the downside – not all – and putting our cash to work at more attractive risk-reward levels. It’s time in the market, not timing the market, that makes the big bucks. Patience and managing fear are the key.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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