31 July 2017: Wall Street’s dangerous state of sleepy complacency

Will Wall Street be caught off guard when the next big one-day drop will hit the market? In an article at MarketWatch yesterday, markets editor Mark DeCambre sees a danger in the recent level of complacency permeating the market. In the current long running bull market, it is easy for Wall Street investors to lose touch with how it feels when typical, sharp market downturns occur. Though not very common, a 5% decline in the Dow happened 12 times since 2000, the last occurrence being in August 2011 (Black Monday). We have gotten so used to the current low volatility levels that we may ask ourselves the question if the market is ready for such a sudden jolt lower. A 5% selloff in the Dow today would mean a quadruple-digit downturn of almost 1,100 points. How would that rattle today’s spoiled investment psyche?

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The S&P 500 and NASDAQ both finished somewhat lower on Friday in reaction to disappointing earnings reported by Amazon, losing 0.13% and 0.12% respectively. Both indices also made small weekly losses: a neglectable loss of 0.00017% for the S&P 500 and 0.24% for the NASDAQ. The Dow, on the other hand, finished at a record, gaining 0.15% for the day. The Dow was the only index which managed to close the week with a gain: +1.16%. Friday’s trading session started with a significant rise in volatility. The VIX reached its intraday high mid-morning at 11.30 (11.8% above Thursday’s close). During the rest of the trading day though, volatility eased. The VIX let go of 10 percentage points since its intraday high and closed at 10.29, a gain of +1.78% for the day and almost 10% for the week. UVXY ETFs followed suit and profited with a nice gain for the day of more than 2%. XIV ETNs lost a bit more than 1%.
Danny Daredevil‘s RSS is now just below 200%. Adventurous Anny is still holding cash and her RSS remained at 33%. Solid Suzy and Lazy Larry had to give in a bit, but kept their RSS above 40%.
None of our models gave a trading signal at the end of Friday’s session.

Model Holds Start date

RSS

YTD

QTD

AAR

Danny Daredevil UVXY 1 January 2016

198.32%

-26.00%

-31.47%

100%

Adventurous Anny Cash 6 March 2017

32.57%

32.57%

-4.39%

103%

Solid Suzy XIV 6 March 2017

40.40%

40.40%

12.17%

135%

Lazy Larry
XIV 6 March 2017

40.40%

40.40%

12.17%

135%

RSS = Return Since Start | YTD = Year-To-Date | QTD = Quarter-To-Date | AAR = Average Annual Return

 

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René spent the weekend in the Belgian province of Luxembourg together with his Asian friends. On Saturday, the group of nine went kayaking in the Ardennes on the river Ourthe. The water level on the river was too low for an easy-going kayaking experience. As everyone was soon to find out, the key was to avoid hitting any submerged rocks, dead tree parts or the river bottom. The bright sunlight that reflected on the water, added to the difficulty level of steering clear of aforementioned obstacles. If you plan to go kayaking on a low-water river, here are some tips that might help you to arrive safely, in a timely manner, and not totally soaked, at your destination. Keep cool. Don’t panic. Go with the flow. Stay in line with the current. Adjust your course when necessary but don’t over-correct. Make speed. If you slow down, you will get stuck easily. And last but not least, maintain a safe following distance from those in front of you. Their mistakes are your danger signs.
This all sounds too familiar, doesn’t it?