I just got off the phone with a hedge fund manager I have known for 30 years, and he gave me the bad news.
He was hanging it up for the year.
The risk/reward in the market now was so poor that it was no longer worth wasting time trying to find good trades.
The world had gone crazy, and waiting for sanity to return could be a long-term project.
The only trades to be found are low return, high-risk ones on which fortunes are never built.
What made his move easier was the fact that he had just posted a record year.
When I spoke to him, he was touring New England with his wife, viewing the changing of the colors.
Such a life!
It was definitely a digestion week for the market.
Stocks that had risen for months took a break. FANG’s got off the mat for the first time since July.
Bonds that had fallen for months saw some short covering.
Adding fuel to the fire were inflation figures on Friday morning showing it was going nowhere fast when an increase was expected.
In the meantime, the indexes stepped begrudgingly to new all-time highs on stairs built out of research reports predicting bear markets, crashes, wildly high valuations, and Armageddon.
We also saw another volatility meltdown for the ages, with the (VIX) trading down to $9.11, a historic low, and the (VXX) paring an eye-popping 37.50% since the August highs.
The short volatility ETF (XIV) I recommended a year ago at $32 made it up to a positively stratospheric $108.88.
As small as my “RISK OFF” hedge is with my position in January (VXX) $60 call options, it still costs me money.
I am not complaining that my house didn’t burn down.
I am just reminding readers that this is a perfect example of how “Markets remaining irrational longer than you can remain illiquid.”
As a result, I lost money last week for the first time in six months.
When you’re playing poker and don’t know who the sucker is, it’s usually you.
As a result, I am now 75% cash, looking to go 100% cash by the October 20 options expiration.
Then I just wait for something to happen, and a sweet spot to open up.
A major factor in our recently ballistic markets has been massive cash flows from Europe, where negative interest rates are still the order of the day.
European junk bonds now offer the absurd yield of 2.2%, less than the present ten-year US Treasury yield of 2.29%.
Does that make sense? No.
Is it happening? Yes.
There is not much to shout about on the data front in the coming week.
The flow has been enough to drive our own junk bonds down to 4.5%, a similarly nonsensical level.
On Tuesday, October 17 at 9:15 AM EST we learn the September Industrial Production.
On Wednesday, October 18, at 8:30 AM EST we obtain SeptemberHousing Starts, which have been lagging of late.
Thursday, October 19 at 10:00 AM we know the September Index of Leading Economic Indicators, a peek six months into the business future.
Then at 8:30 AM EST we learn the Weekly Jobless Claims, which could be anywhere, thanks to the twin hurricanes.
On Friday, October 20 at 10:00 AM we receive September Existing Home Sales, which are now running at a 5.35 million seasonally adjusted annual rate.
Wrapping up the week at 1:00 PM is the Baker-Hughes Rig Count, which delivered another rare fall last week.
As for me, I am headed up to Napa and Sonoma counties this weekend with a bundle of $100 Target gift cards in my pocket.
Two family members and several friends had their wine country homes burn down, leaving them only with the clothes on their back.
More than 6,000 houses have burned down on 200,000 acres, an area larger than New York City. 36 have died.
All East Bay schools are closed today because of air quality problems, the worst ever recorded. No one has been allowed outside for a week.
The government is asking families to sleep in shifts in case the wind changes and you neighborhood catches on fire.
The infernos will continue until Thursday, when rain is mercifully expected, the first in five months.
I offered to fly a spotter plane for the California Civil Air Patrol, but they said they were inundated with volunteers.
That’s America for you.
Good luck and good trading.
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