6 October 2017: Melt up

You probably have heard of a ‘melt down’. Seasoned investors think that we are currently experiencing the opposite in the markets: a ‘melt up’. On Thursday, the S&P 500 notched its sixth consecutive record close, its longest such streak since June 1997. A melt up happens when we see a dramatic and unexpected improvement in the markets which appears to be driven for the most part by investors who don’t want to miss out on the previous surge of the markets. Fundamentals do not give rise to such substantial gains under those circumstances. At many occasions, melt ups have turned out to be the precursor to a strong correction of the markets. Will it happen this time? We cannot be sure and it is hard to tell when it is going to happen. But warning bells should be ringing by now.

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Yesterday, Wall Street got a boost after the House of Representatives passed a budget resolution, which is regarded as setting the stage for President Trump’s promised tax cut. All major indices closed at record highs once again. The Dow added 0.50%, the S&P 500 gained 0.56% and the NASDAQ jumped 0.78%. Volatility eased further, with the VIX dropping to as low as 9.13 points during the trading session and posting its lowest close ever at 9.19 (-4.57%). UVXY ETFs suffered another bad loss of almost 7%. XIV ETNs rose substantially and closed above $100 for the first time, gaining more than 3%.
Danny Daredevil was yesterday’s loser: his RSS dropped to 27%. Adventurous Anny is holding cash. Her RSS remained at 9%. Solid Suzy and Lazy Larry remain in a very good mood: their RSS rose to 54%.
None of our models gave a trading signal at the end of yesterday’s session.

Model  Holds Start date

RSS

YTD

QTD

AAR

Danny Daredevil UVXY 1 January 2016

26.82%

-68.54%

-8.98%

14%

Adventurous Anny Cash 6 March 2017

9.22%

9.22%

0.67%

16%

Solid Suzy XIV 6 March 2017

54.06%

54.06%

5.32%

109%

Lazy Larry
XIV 6 March 2017

54.06%

54.06%

5.32%

109%

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

 

RS_v05-smallRené’s Reflections @ Friday: One loose cannon

Three weeks ago, I wrote about the similarities between economical crises and natural phenomena, like hurricanes, volcanic eruptions, epidemics, earthquakes and avalanches. They build up slowly and steadily before they come to a sudden, violent outburst. As easy as it is to understand, and even predict, what happens during the build-up process, it is incredibly difficult to say anything meaningful about (the timing of) what follows. Exactly what factor plays a decisive role in destabilizing a complex system? In the example of the avalanche, it could be the last snowflake that makes the snowpack collapse under its own weight. But in most cases, it is some unrelated external event that will trigger the collapse. One footstep, one loud sound, one skiing madcap, one loose cannon can do more than billions of snowflakes can do. In a similar way, bull markets ‘don’t die of old age’. It’s always that unexpected event that throws a spanner in the works. This second biggest bull market since World War II will not be an exception to the rule. All it takes for it to come back down, is one loose cannon…