Stock markets have changed.

 

Yes and it is the irresponsibility of those who continue to act as if today's market is running like 5 or 10 years ago. It is not.

 

What has changed?

Many things but these are the main influencers:

 

1. Liquidity and the absence of other investment channels

   • The amount of money today is greater than ever following the central banks' quantitative expansion plans in 2008 and the Corona flows

   • Zero or Negative Interest Rates - Inflation does not raise its head, so central banks cannot raise interest rates. As a result, achieving realistic returns on investments in conventional savings channels is not attractive enough.

   • Bubble - We can argue whether we have a bubble or no bubble - which sounds compelling one way or the other. At the facts level, after years of stock market rises fueled and energized by the liquid rivers created by the central banks - the real economy has not recovered from its ills, creating a gap that needs to be closed. The Corona crisis will only speed up the flow of funds - a move that by all means postpones the end - but the moment of truth is inevitable.

   • The castration of the central banks - their ability to manage the next crisis has greatly diminished - in light of the exhaustion of the monetary expansion of quantitative ease and the neutralization of the interest factor from the equation. So what they can do is more of the same - postponing  the end and blast to someone else's vigil.

2. Algo and machine trading - Today's markets are dominated by machines and algorithms and everything is measured in milliseconds. It causes sharp intra-day movements,  boost volatility and demolish trust in fundamentals and common economic behaviors.

3. Communication and analysts - the media today is 24/7 available and it  needs to be active all the time - to justify its existence. The flood of information from d various experts threaten to drown anyone who consume this information on a regular basis.  The Financial industry today is mainly concerned with making forecasts and issuing recommendations whose expectancy statistics are equivalent to a flip of a coin... At the stock level - the media goes hand in hand constantly analyzing the gap Between the recommendations and what actually happens - as if that is the real thing. So the simple investor can invest in a company stock that shows great results - in terms of extension and growth - but the stock crashes because analysts "missed" and thought it would earn another cent or two ...

4. Insider Information - It is restricted by law but ... there will always be those who have the advantage and knowledge that is not public domain. Then the common investors community is the cannonball on which insiders and major share holders earn their profits, shake it and eventually liquidates the stocks to the public just before the crash.

 

All of these things end up with one result that embodies the essence of change:

 

VOLATILITY

 

Volatility is nothing new - it has always existed but - everything described above has made it wild and dominant than ever. As a result, it has become a major factor that must be taken into account and acted upon - when operating in the capital market.

 

The Omaha Guru - The legendary Warren Buffett said he has two investment rules:

Investment Law # 1 - Don't Lose Money !!!

Investment Law # 2 - See Law # 1 !!!

Behind these rules is simple math:

If you lost 10% you should earn 11% to regain the loss.

If you lost 20% you need to earn 25% to regain the loss

If you lose 50% you have to earn 100% to regain the loss

 

So how does this relate to volatility? - because of the endless stream of money,  because of the machines and the analysts, the none stop media flow and because of inside information ==> 

Even careful and solid investors, too, can face great losses - because they do not have the knowledge or ability to weigh volatility in their decision - making processes .

 

Over the past 15 years, the S & P500 - the index of large and strong stocks - has  2 events of 50% drop. If this happens in the S & P500 - it can happen much more significantly in the less powerful stocks.  So the simple investor's ability to time right when to be in the market and when to exit the market - equivalent in intensity walk on the edge of active volcano  -  whose burst prospects increase as the taken actions can only delay the coming collapse.

One might expect it to recover later - but who knows if anything stays around when it does and who assures us that it will? The only sure thing is that the next fall is coming.

 

Market timing

 

In the capitalist world in order to have a fortune, someone has to produce or sell something that has value.

In fact, accumulation of capital is the result of a lot of shopping and sales where a cumulative gap is created = a profit between the cost of the purchase and the amount of the sale.

If we go back to Warren Buffett - he never buys shares whose price is expensive - he always waits until their value drops below the cash flow the companies make and only then is it is a buy opportunity.

 

Therefore - the timing of the action in the capital market sometimes cuts the bottom line - profit as we all wish or a burst loss that needs mental strength and resilience to get out of it.

 

Why trade volatility assets?

 

The simplest and most immediate answer is that understanding in the field of VOLATILITY assets is a necessary tool to properly time the market and secure the profitability of our investments.

There is also something here to say - go with the central banks or at least be in tune with the impact of their moves. It's no secret that central banks mandates are to maintain stability so they will use whatever it takes to prevent 50% declines. In fact, their mandate simply phrased is - to "kill the volatility" which, for them, can be a snowball trigger that they are increasingly having trouble to control. Also, 10% declines are not healthy for central banks, so understanding their moves - in terms of volatility - is critical for timing to any life seeking investor.

In the broader aspect - investing in volatility assets is certainly not trivial and there are many good ones who have lost quite a bit of money on these assets. They are characterized by great daily volatility as well as large gaps and  intra-day changes. They also leap or drop as the nervousness in the market rises or falls.

 

On the other hand - there are no analysts' forecasts here, no inside information and no company performance, which reduces the level and types of noise. In addition, there is also a structured mechanism for rolling on futures contracts  traded on a daily basis - resulting in defined logic that influence the relevant Exchange traded funds and notes

A good trading strategy for these assets should know this logic and "dress" the right fine tuned timing  for buying and selling.

 

Another pan of volatility assets - the ability to predict market direction - in the cleanest and purest way, since by definition they are tuned to on the pure  most sensitive thing. Remember - the VIX index weighs the implied volatility in the prices of CALL and PUT options on the S & P500. Simply put - it touches the exposed nerves - so it is also called the index of fear.

 

In 2009, a volatility-based asset category was first introduced on the US Stock Exchange. The first traded note was VXX, which is defined as the iPath S&P 500 VIX Short Term Futures ETN.

 

The benchmark is the VIX. This index, by definition, cannot  be traded daily on the stock exchange and therefore uses ETFs that track its futures. On November 30, 2010, the XIV certificate, defined as VelocityShares Daily Inverse VIX Short Term Futures ETN, was also launched. This certificate is in fact the opposite of the VIX index and should rise as its futures decline.

In 2012, the SVXY certificate was launched - also a short certificate on the VIX

Date to remember February 2nd 2018 - The collapse of the XIV - see extended details  separately

These traded notes are characterized by very high marketability and also ... high volatility. This, of course, increases the risk of trading in them and, on the other hand, creates extraordinary profit potential - given a good strategy.