After multiple tries at time in the markets and even daytrading, I quickly learned that the emotional discipline needed to be successful in these activities was not for me. However, I have always been able to leverage my financial acumen in reading financial reports engaging the economy to have somewhat of a successful ability to make proper allocations and assets over a long period of time. This has allowed me to build a portfolio of assets that I intend how to move lead me to a broader financial independence where I no longer need to work for money and instead will make the money work for me.
However, over the last three years I have been significantly wrong in leveraging the performance of the financial market. I have mostly been out or completely against the market over the last three years despite the overwhelmingly positive performance the market has seen. This led me to withdraw completely from the market last October. I decided to take a break and level set myself again about taking advantages of some of the losses to offset earlier gains from my cryptocurrency portfolios. Since then, it has been an interesting ride to see the market and the way it has performed. I believe we find ourselves in one of the most uncertain time periods in relation to economic activity around the world. I have felt that the financial markets are not adequately pricing in this uncertainty which has kept me away from participating despite my urge to get involved.
One of the metrics that I follow closely is the volatility index which is based on the real time prices of options on the S&P 500 index and per the website, is designed to reflect investors consensus view of future expected stock market volatility. When this index is high, it means that most participants think that prices will change significantly in the next 30 days. When the index is low, they expect little change to prices. However, in practice the volatility index has an inverse relationship with the level of stock prices. It increases when stock are pressured downward and vice versa.
Since the financial crisis in 2008, we have seen a downtrend in the volatility index which has correlated with one of the longest bull markets in stock market history. As it felt that corporate earnings and economic activity were reaching a peak in 2017, I started to go long volatility expecting a peak in stock price given valuations. I was horribly wrong as it turned to be one of the strongest markets in recent history which gave me one of my largest investment losses I have ever taken. He quickly reminded me of why my emotions often get the better of me when it comes to trading. as I continue to look at the metric, I continue to be astonished at how relatively low it is despite the buildup in uncertainties related to important valuation factors for the stock market. For example, the continued trade war between the United States and other countries has already started to see impacts across the global supply chain; however, only those companies directly impacted have seen their valuations hurt. Our economy, as we learned during the financial crisis, has become very intertwined which concerns me for the secondary impacts of these uncertainties to have and companies in their earnings despite not being directly related to the issue.
The yield curve is another indicator in that many use to gauge the market and the economy. It has been signaling for sometime now that there is a potential or recession as the inversion of the curve as predicted number of economic downturn‘s in the past. However, given the Federal Reserve and their activity in the open markets, we can never really tell how the market is perceiving the future economic landscape . This intervention or what many call manipulation is a concern as it will not allow for many market participants to adequately position themselves when the turn in the market comes. The best example was what occurred in the last quarter of 2018 when stock prices almost got into a formal bear market of almost a 20% reduction in prices before rebounding given some rhetoric from the Central Bank regarding interest rates.
One thing is certain, the time for markets to adjust to reality and valuations will be quicker and more volatile than we have seen in the past. Given the amount of leverage and debt still in thr market, this could lead to concerns as important participants could lose liquidity and capital too fast to react to the changes. It seems as despite having a “strong” economy in some metrics, we are only an event away from a severe downturn. The indicators continue to show some strength but the market seems to be at a pivot as yields are demonstrating a downturn but the Volatility does not show fear from the participants. While I think it may be because the expectation of government intervention, I grow concerned for the valuations of risky assets, which inlcude cryptocurrencies. While mostly uncorrelated, when liquidity is needed, there will be an indiscriminate selling of any asset to ensure solvency in many cases.
While I have been mostly wrong in the recent past, I thought I would start sharing these perspectives in an effort to gain some thoughts around this. Feel free to let me know your thoughts or feedback below. Look forward to engaging with the community on this subject.
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