By Richard Matthews February 11th
Sailing was one of my great passions when I was younger and indeed I sailed the Atlantic with a bunch of friends a few years back which was one of the experiences in my life and taught me not only a great deal about myself and the natural world but also about awareness. When it’s literally a matter of life and death you tend to concentrate hard on what is happening around you and watch carefully for any changes occurring. For instance if you are thinking of diving of a boat for a dip don’t do so when Flying fish are jumping as it means that there may be a big fish , a Shark perhaps, chasing them . Watch the sky for signs of mackeral clouds Cirrocumulus as they may well be the sign that Cumulonimbus and a storm are on their way. As an old proverb says “Mackeral sky and mares’ tails, make tall ships carry low sails”. Last weekend I wrote about the markets and watching for hidden signs at the time I had been keeping a weather eye on the Vix index.
The Vix had been edging up for some time and to return to my analogy the sight of that was like seeing the first whitecaps appear on a previously calm sea during a pleasant Mediterranean afternoon cruise. Whitecaps, for the non -sailing readers are the little plumes that form on the swell of a sea which point to the wind increasing. What was, and possibly still is, hard to predict is whether the market action last week were the whitecaps forming and then followed by the squall or indeed are they are the forerunner of a full blooded Mistral. Time, as always, will tell but there were some worrying signs that this was more than a little squall and that we may be in for a full blooded storm and it appears that sadly the crew has enjoyed an overlong lunch and imbibed too heartily of Provencal Rosé.
Never ever drink when you are sailing is a great maxim and in these days of tighter office procedure very little drinking takes place at lunchtime and yet the markets moved around with all the subtlety of a drunken sailor last week. New records were created for the biggest this and the largest that and people this weekend are arguing whether it was a flash crash , a correction or whether the bears are rubbing their paws together to feast on the honey of a full blooded bear market. To me records don’t matter. What we saw and possibly more importantly what we didn’t hear last week, are the lessons to be absorbed.
Never go short in a rising market
Now let’s be clear and straight about this we all love volatility it is just what we do with it. If we lose money it’s because we bought or sold at the wrong time. End of story. I’m not an economist but I do know one thing for certain anyone who loses money by shorting volatility is due a lifetime membership to the ITC ( the newly created idiot trader club) and deserves to be financially caned. Volatility will range trade reflecting the normal fluctuations of a market and being an old hand I would always be wary of the black Swan event that skews the price violently upwards and as I learnt, and hands up to my cost, don’t ever sell premium. And yet we hear the squealing as if we lived in a piggery of ignorant traders who having been in the market for ten years think they know all there is about trading and believe that equity markets can only ever continue to the sunny uplands and volatility will stay benign. Idiots. Volatility was always going to return that was clear, and by the way we should all welcome it, just what wasn’t clear was what would trigger the move.
I watch the Vix pretty closely and it had been range trading nicely over the last few months but it had been edging out of its trading range towards 12. What was this gentle spike up telling us? It wasn’t telling us to sell it (unless you were long) it was warning of a storm coming just like the first white caps and breath of wind when you are sailing warn you that the weather may be changing but unfortunately it appears that the crew had been on the lash and didn’t look around for other signs and as such failed to see the barometer dropping.
The move was started back in December as Bonds started to retreat and was encouraged by the US jobs data that came out on Friday 3rd February which prompted the Devil fall of 666 points. This move carried on and as I mentioned at the beginning the talking heads discussed records. Well records mean nothing and what was telling was the influence of those that said very little. There was no calming talk for the markets from Jerome Powell in his first days in the job and Carney , surprisingly ,instead of pouring oil on the water poured honey on the breakfast of the Bears by mentioning that rate rises were more imminent than had been first thought.
The Central Banks have been brewing up and administering the crack cocaine of QE for so long the markets thought it would never end and there is a generation of traders now sitting at the boards that have grown seeing this action and in their ignorance thought that the markets were always benign and sold volatility. Well it has ended and we are entering the choppy waters of normalisation and it feels like the central banks have decided that’s it regardless. Not one soothing word from the Central banks so batten down the hatches guys we are in for a rough time. The temperatures is rising and the fever is hitting but this time I think the signs are that market may not be catching a cold but about to experience full blooded cold turkey.
How rough a time will tell but we will continue to see sudden spikes in volatility and sell offs and all the old phrases such as dead cat bounce are being wheeled out. Personally an expression I loathe and being topical and sticking to the seasons I think a pancake bounce will be more appropriate and having practised tossing them this weekend in preparation for Shrove Tuesday I can tell you they don’t bounce that well.
Meanwhile Europe lurches along with the mainsteam press ignoring little Napoleons problems in Corsica, Frau Merkle’s growing problems both politically and with industrial scandals such as VW and Deutsche bank she looks increasingly vulnerable. And then there is Italy. Well Italy and its forthcoming elections are worthy of a whole book let alone a footnote to a column. I love a coincidence and how about the Italian Elections and the vote on Merkel’s coalition both being held on March 4th Be under no illusions we live in a period which is only going to see volatility increase, please don’t go short the Vix, and if you don’t have the inclination to play safe haven instruments such as gold could be for you. Be very wary of the damage that last week did and remember as the sage of Omaha; Warren Buffet said “when the tide goes out, you see who is not wearing swimming trunks.