If you reached Thursday last week without indulging in any kind of drinking to calm your nerves: Good for you! We didn’t! However, activating our green fairy superpowers gave us some ideas on how to profit from the supposedly upcoming storm. So have a sip and read on.
So, here are three easy ideas, which are clearly no advice and should not be implemented by anyone. Some of them are real classics, so that’s why I put them here.
- Take your money and run! Just kidding. If you believe in comebacks, now could be the perfect time to invest in value stocks. Why? Well, first of all they seem to be undervalued. Or as Cliff Asness puts it: It’s time for a venial value timing sin. But second of all, if you think the Virus situation will carry on but you still want Equity exposure, you should look for something that is less affected by inflation. You know, no production and supply chain interruptions in China means potentially higher prices for goods and commodities. So having a low duration Equity basket might be beneficial as soon as interest rates will rise to battle inflation. Also note that since this is not a crisis caused by the financial sector, rate cuts might not be the solution. Rather helicopter money and tax cuts seem to be the measure of choice to alleviate the pressure this situation puts on individuals and businesses. The trade can also be implemented via short puts on single names or value ETFs.
- The steepener trade. Probably the favorite trade of Kevin Muir from the MacroTourist. If you expect the FED to act nonetheless and support the economy by cutting rates in the short term but you are expecting higher inflation in the long term, this might be your choice. Also note that if institutional portfolios are hit by the shock in equities, they might be driven to long term bonds again (play it safe), making the trade attractive. If you are thinking interest rate volatility AND inflation, look no further than the IVOL ETF. A match made in heaven.
- Dividend futures. In times of stress, there is downward pressure on prices as dealers hedge out the risk across billions of dollars of retail structured products by offloading dividend futures, which often causes the dividend futures market to trade at a deep discount. Even option markets on some dividend futures exists and buying calls or putting on risk reversals may make sense.
- Trend following! While for mid- to long-term CTAs last week surely was no picnic either, the same held for the financial crisis in 2008. However, convexity and positive skew did pay-off once the crisis carried on. Also note that some short-term CTAs performance during the last few days was exceptionally good, I strongly advise you to have a look at the 40in20out Real Time Trend Trading Experiment.
Since the last part of the weekly review has somehow become kind of a homework section: Read this, study that, get a drink and trade your way into the week. We will finish with suggesting to read this article where Trandstrend’s Harold de Boer talks about the evolution of trend following. The topic was also discussed by Nils, Jerry and Moritz on last week’s episode of the Systematic Investor Podcast.
While we can’t agree more on this,
Unorthodoxy doesn’t sell well; it essentially states: we do not worship what most investors believe.
some parts are also irritating:
The focus has shifted from trading as many as possible markets to striving to be sizeably positioned in different trends. If a market is just a less efficient way of trading the same trend that can be more efficiently traded through other instruments, there is no value in trading it,” says De Boer.
We believe that the correlation between markets is never perfect and therefore increasing the number of markets yields diversification benefits and widens your spectrum to place bets.
So long and happy trading!