Volatility has been at its peak this year dominating these choppy markets. Fund managers are desperate to deliver decent results and volatility is not helping them. The reality is that it is going to be a tough year to show big returns even for us market timers. We earn our paycheck mostly during bear markets.
Now here are some facts for you about hedge fund managers. There are nearly 6800 hedge funds trading the market these days. They trade more aggressively than mutual funds where the sole strategy is to buy and hold only long positions. A large number of hedge fund managers short the markets on any “overbought” conditions and their short-term trading style can create much wider daily swings, such as experienced in the past couple of sessions. While their trading doesn’t typically change the direction of a trend, it can certainly dampen it. Higher volatility creates wide daily swings and excessive weekly chop.
Here is another factor contributing to the high volatility in the current market. On Friday we had a quadruple expiration day, referred to as a “quadruple witching hour day.” Here is the explanation. Quadruple witching happens when three related classes of options and futures contracts expire, along with the individual stock futures options. On the day of a quadruple witching, many investors attempt to end their futures and options positions before the contracts expire. This activity often includes repurchasing contracts and/or closing out market positions. Quadruple witching days are usually accompanied by considerable volatility in stock and derivative prices, as well as increased trading volume. Knowing that this is a volatile time, investors can anticipate and plan for the potential effects. For example, on the quadruple witching days in 2014, the average trading volume was 5.2 billion on the S&P 500, compared to a 3.37 billion daily average for the period of March 20, 2014 to March 19, 2015. On Friday the volume was dramatically higher on the trading session (about 40% above average).
Our recent long positions in US and Canadian Index Traders, which trade more actively, quickly got stopped out within the same day of our entry Thursday the 18th. This is good confirmation of the high level of volatility in these markets. Our positions were sold with a loss of 1.5% for SPY, and 2.6% for SSO. The stops really saved us from additional losses of Friday.
One recommendation to all our subscribers is to seriously consider trading part of your money with our Long Term U.S. trader. The returns are just as good with far less trading activity and emotional up and down than the regular U.S. and Canadian Index Trader. Have a look at the SSO and SPY Historical data in the U.S. Index Trader.
In addition, we also suggest you watch the interview of well-respected investor Carl Icahn to get his view on the economy and the high-yield bond market meltdown. It is very interesting! http://carlicahn.com/