Market Up/Vol Up, Market Down/Vol Down…WTF Episode

So – what’s happening in the wide world of volatility? The market moved to new all time highs and the VIX actually went UP. The market then mini-crashed lower and VIX barely budged? WTF indeed? Is it Robinhood traders? It is market makers? Is it sustainable? To break it down we’re doing another of our WTF episodes, and are joined by two VOL pros, Matt Thompson – Managing Partner at Thompson Capital Management, and Pat Hennessy – Head Trader at IPS Strategic Capital to talk about volatility, VIX, and options trading inside the market dislocation.

 

 

Listen to the entire episode on your preferred platform:

 

Chapters:
00:00-01:36 = Intro
01:37-31:46 = The VIX in the past month
31:47-46:11 = The Elevating of the VIX & The reasons behind the curve
46:12-54:47 = Strategy Impacts
54:48-1:00:05 = Where do we go from here?

 

Follow along with Matt (@dynamicvol) and Pat (@pat_hennessy) on Twitter, and check out their websites for more info on their strategies at Thompson Capital Management and IPS Strategic Capital.

Canadian Commodities and Building Business with Tim Pickering of Auspice Capital Advisors

In today’s episode we’re pushing the boundaries of traditional alternative investments and getting into oil trading, trend following, and taking risks (both in business & with your strategy) with Lead Portfolio Manager and CIO at Auspice Capital Advisors, Tim Pickering. From trading shell oil to striking out on his own – Tim’s expansive experience in the alts world is about as big as the Canadian Wilderness he hails from. Today we’re talking with Tim about Lewis and Clark, Tim’s background in oil, willingness to fail, commodity market benefits, Canadian oil production, what a product suite entails, providing alpha and diversification as a trend follower, Canadian beer, striking out on your own, discovering new (profitable) ventures, Calgary rodeos, oils negative -> rally movements, strategy evolution, Chicago or Miami, and Lake Louise.

Listen to the entire episode on your preferred platform:

 

Chapters

00:00-01:27 = Intro

01:28-25:47 = TD, Shell, Enron to Two Men & a Dog

25:49-53:36 = Trend Following, Commodity Volatility & Aspects of Momentum

53:37-1:18:49 = Focusing in on Auspice

1:18:50-1:23:02 = Favorites

 

And last but not least, follow along with Tim on Twitter and LinkedIn and make sure to check out Auspice Capital Advisors.

 

Asset Class Scoreboard: August 2020

July to August was probably the least movement across that board that we’ve seen so far in 2020. U.S. stocks continue to top the board month over month, as well as U.S. real estate and commodities continuing to trail in the red. Are commodities going to be able to move out of double digit red for the year or is that moving to a 2021 goal?

Managed futures recorded one of the only dips of August and getting closer to dipping lower for 2020 on the year.

Past performance is not indicative of future results.

 

Past performance is not indicative of future results.

 

Sources: Managed Futures = SocGen CTA Index,
Cash = US T-Bill 13 week coupon equivalent annual rate/12, with YTD the sum of each month’s value,
Bonds = Vanguard Total Bond Market ETF (NYSEARCA:BND),
Hedge Funds = IQ Hedge Multi-Strategy Tracker ETF (NYSEARCA:QAI)
Commodities = iShares S&P GSCI Commodity-Indexed Trust ETF (NYSEARCA:GSG);
Real Estate = iShares U.S. Real Estate ETF (NYSEARCA:IYR);
World Stocks = iShares MSCI ACWI ex-U.S. ETF (NASDAQ:ACWX);
US Stocks = SPDR S&P 500 ETF (NYSEARCA:SPY)

All ETF performance data from Yahoo Finance.

Retail Traders Rejoice

Has there ever been a better time to be an individual trader, or retail trader as they are sometimes condescendingly called in the professional trading industry. What with Dave Portnoy (DDTG) saying (correctly for now) that stocks only go higher, or Robinhood forcing nearly all brokerages to offer commission free trades for stocks and fractional shares.

Business Insider estimates that nearly 25% of the stock market volume is driven by retail investors. That’s about double what it was 10 years ago and reminding people of the good old dot.com boom days.

Individual investors made up just 10% of the market’s trades in 2019. That share then crept to 15% as popular brokerages including E-Trade, TDAmeritrade, and Charles Schwab erased their commission fees and lowered the barrier to entry for casual traders, Mecane said. (Business Insider)
(WSJ)


Stock Splits Don’t Increase Value?

Perhaps it is this renaissance of the retail trader that is driving equities higher. It sure looks like it when we see two of the biggest companies in the world jumping in value after they split their stock (something, which economically speaking, doesn’t create or remove value – being that you get more shares at a lower price for the same total value) We’re talking Tesla and Apple, of course. Per the WSJ:

Apple added $4.23, or 3.4%, to $129.04 after the tech giant’s shares began trading following a 4-for-1 split, essentially giving investors three more shares for every one they owned. Tesla shares jumped $55.64, or 13%, to $498.32 after the electric-vehicle maker’s 5-for-1 split. Both stocks closed at records.

This doesn’t make a lot of sense. If you can already purchase fractional shares, then why is a lower priced $TSLA more attractive? Maybe because you can then afford some options on them?

 

New Retail Focused Futures/Options Products

Our friends at the futures exchanges are surely noticing this trend…

We previously wrote about The Ice’s FAANG+ which includes the original Facebook, Apple, Amazon, Netflix, Google and tacks on Alibaba, Baidu, Nvidia, Tesla, and Twitter. That was just two months ago and The Ice has come out again with new contract sizes coming out, using a direct quote

September 28, the NYSE FANG+™ futures contract size will be reduced to $5 times the NYSE FANG+™ Index. This lower increases opportunity and provides a retail friendly solution.”

& to be fair, they’re kind of killing it….


(
The Ice)

And ICE isn’t the only exchange flipping the retail switch. The CME was perhaps early (or prescient) on this, launching their Micro version of the e-Minis 20 years after the first and now one year later launching the e-mini Micro options.

CME Group…announced the launch of options on its Micro E-mini S&P 500 and Micro E-mini Nasdaq-100 futures contracts, which became available for trading today.

Options on the Micro E-mini S&P 500 and Micro E-mini Nasdaq-100 futures are 1/10th the size of their E-mini options counterparts. The listing cycle for the new options consists of five Friday weekly options, three end-of-month options and two quarterly options contracts.

So, what do you want, Mr. and Mrs. retail trader? Spend $50 on some fractional shares of Tesla, $25 on some out of the money Micro e-mini Puts or own all the high fliers in one $5 increment Faang+ futures contract. It’s never been so easy to make/lose all your money.

Futures are Hard – Hurricane Edition

Who doesn’t love a good hurricane. The slow moving train wrecks rotating on our screens draw people like moths to a flame, or as our own Jeff Malec put it:

Thank goodness for modern science and satellites and Jim Cantore who can properly warn anyone with a cell phone (i.e. – everyone) when it’s worth paying attention to, when its time to evacuate, and so forth. We may all secretly and perversely like seeing the raw power of nature, but surely nobody wants anyone to get hurt.

Which brings us to a different kind of hurt – market movements with hurricanes. While a lot of us were left scratching our heads on how futures markets could see crude oil go negative back in March, hurricanes give a great example of how futures markets work with different delivery dates (and places). Hurricane Katrina and the mess it made of New Orleans has long been the classic example of this, and with Hurricane Laura bearing down on around 20% to 40% of US refinery capacity, this seems like a good time to review how this all works.

You start with raw (or Crude) Oil, much of it pumped from Texas or from offshore rigs in the Gulf Coast area, and you put it into a refinery to process it into usable gasoline and other distillates, in a process they call “cracking”, thus the term the crack spread, which is the Crude Oil vs its offspring, gasoline. The gulf coast typically runs at about 95% capacity rates, meaning it uses nearly all of its capacity for refining Crude Oil into gasoline (and other oils used to make everything from tires to plastics and all sorts of other things).

Enter a nasty hurricane that could bring 10 feet of storm surge and blow pieces of your refinery a few miles away. What to you do? You shut down the refineries until the storm passes, to protect the equipment and keep the people safe. No refining means less gas supply, means higher prices per simple supply/demand economics. Now, if that’s for a few hours, or even a few days… no big deal, the refining will be back on line shortly and all that happens is a few gas stations may have their new gas shipments delayed a few days and prices may go up slightly.

But if it is a major catastrophe on the scale of Hurricane Katrina, and refineries are knocked out for weeks, you get a very different scenario. There’s plenty of oil, you just can’t refine it. You can’t get in there to turn the machines back on, which causes a unique environment where the front month futures contract spike dramatically, because all the gasoline available for that delivery will be used up (they won’t be able to refine more of it), while the further out (potentially even the very next month) contract will fall, because once that plant turns back on, the gasoline trapped in there plus new gasoline will start flowing. That’s not economic demand, it’s not about finding a new oil well and supply. It’s not about the raw oil you’re refining becoming more expensive. Not, it’s almost entirely about just a timing issue – where you can’t refine the oil til next week or next month, and that date falling outside of the futures expiration. Here’s what those spikes look like when normalizing the gas price to the price of oil to remove spikes due to oil spikes.

All that is to say futures are tricky. As we found out with the negative oil price earlier this year. The expiration dates matter. Whether you can store (in that case) or get access to (in hurricane cases) oil or gas by the delivery date can become the main driver of prices in certain extreme examples. When trading USO or similar products which use futures to track commodity prices, we sometimes forget that actual behind the scenes mechanics. Hurricanes and pandemics can remind us quickly that those small details matter.

One last note on so called delta neutral trading strategies such as trading the crack spread or trading a calendar spread in Gasoline where you may be short Sep. futures and long Oct futures. Such strategies can be sneakily seductive, making one believe there is less risk because the overall market moving up or down won’t hurt your position (being long and short at same time). It is only a change in their relative standing which will cause profits or losses. Don’t be fooled. These strategies can blow you out faster than you can say Amaranth if the dynamics between months or products shift because of something like…. a hurricane.

Stay safe, everyone.

More reading = our past hurricane related posts here.

Straddles, SVXY, and (Gamma) Scalping with Logica’s Mike Green

With a Top Gun-like bio of working with billionaires and big hedge funds, Michael Green is one of the top prospects in the alternative investment game. BUT, all we hear him talking about these days is his passive thesis, to the point where he jokes – that may end up on his tombstone one day. We’ve heard all that elsewhere, so wanted to get into more – like what he has going on at Logica, if he loves straddles as much as Wayne Himelsein, how he views the current volatility landscape, his killer SVXY trade, The Princess Bride, adding fragility into the market, the tail wagging the dog, Coit Tower, Twitter business partners, opportunity cost vs covering the bleed, Zoom due diligence, and Gamma scalping.

 

 

Listen to the entire episode on your preferred platform:

Chapters:

00:00-1:34 = Intro

01:35-38:01 = An Epic Beginning

38:02-58:54 = Talking Strategy

58:55-1:30:50 = Passive Investing, the Fed & What’s going on right now

1:30:51-1:35:54 = Favorites

 

Follow along with Michael on Twitter and LinkedIn

And last but not least, don’t forget to subscribe to The Derivative, and follow us on Twitter, or LinkedIn, and Facebook, and sign-up for our blog digest.

Expect the Expected and Control the Controllable with Russ Rausch of Vision Pursue

We’re leaving the fire of hedge funds and jumping headfirst into the frying pan of……performance mindset? Yep, from pro athletes to pro traders, everyone needs a performance mindset, and today’s guest founded his firm to help get those who need to perform, ready to perform.

Russ Rausch (former Trading Technologies/Emil Van Essen exec) refocused his passion from the trading arena into training automatic thought and emotional patterns to improve; performance, resilience, and engagement to anyone from the Atlanta Falcons to Chicago prop firms. In today’s broadcast we’re digging in with Russ about Kansas life, how hedge funds influenced Vision Pursue, changing your thought pattern, working with big names from finance to the NFL, Balboa Island, highs and lows of the hedge fund business, expecting the expected, “coming across” neuroscience, background of Vision Pursue, controlling their controllable, the life experience test, paddle boarding, separate – embrace – evaluate, fish tanks, and how Vision Pursue can help you perform better.

Listen to the entire episode on your preferred platform:

Chapters:

00:00-1:20 = Intro

01:21-14:44 = Background

14:45-30:59 = Transitioning & the Development of Vision Pursue

31:00-49:06 = Clientele & The Three Pillars

49:06-1:03:30 = The Takeaways from VP Training

1:03:31-1:08:32 = Favorites

 

Follow along with Russ on LinkedIn and with Vision Pursue on Twitter, LinkedIn, and Facebook. Or – book Russ for your next keynote speaker or town hall here.

And last but not least, don’t forget to subscribe to The Derivative, and follow us on Twitter, or LinkedIn, and Facebook, and sign-up for our blog digest.

 

Disclaimer: This podcast is provided for informational purposes only and should not be relied upon as legal, business, or tax advice. All opinions expressed by podcast participants are solely their own opinions and do not necessarily reflect the opinions of RCM Alternatives, their affiliates, or companies featured. Due to industry regulations, participants on this podcast are instructed not to make specific trade recommendations, nor reference past or potential profits. And listeners are reminded that managed futures, commodity trading, and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors. For more information, visit www.rcmalternatives.com/disclaimer

Rocks and Risk

Jeff Malec here. The family and I moved our work from home to remote site work from home for a bit here in August, driving out to Colorado and Utah to get some outdoor time in the afternoons while working in the mornings. One of the afternoon adventures was rock climbing in Ouray, CO (as pretty a place as you’ll ever find, if you get the chance to visit). Here’s a pic:

 

Luckily (for you) we’re not turning this into a family picture blog. No, this bit of personal background is just to say that the sport of rock climbing had me thinking about risk in a big way. But not in the simplistic, rock climbing is risky way. No, it was more in the rock climbing has figured out how to control risk as much as you desire way, much like professional hedge fund managers and trading firms. Rock climbing, like the trading world (despite what Dave Portnoy says), is inherently a risky endeavor. Fall off a 100-foot rock face, you’re probably going to die. Short Tesla as it rips up $1,000/share and you’re probably going to severely kill your portfolio.

You need risk controls to make sure a mistake isn’t your last mistake. In rock climbing, with kids, that meant the professional going 50 feet up (on ropes) and securing our lines into chains drilled into the rock (two of them, btw, as a backup protocol), that meant a fail-safe auto-locking belay device in case the guide faints or gets knocked out by a rock, that meant learning commands to communicate any problems (like yelling rock for when the climber knocks a rock loose, sending it down towards those supposedly not at risk). Perhaps nowhere more in sport are the activity and the risk control so separated. The act of climbing itself has nothing to do with ropes, cams, carabiners, harnesses, helmets, and so forth. That is all for the risk control. Indeed, you can do all of this without the risk control devices, just as Alex Honnold famously did free soloing El Capitan in Yosemite, but he is maybe the sole being in the universe who would accept that as an acceptable risk.

Which brings us back to trading and the investment world – where the ropes and helmets and harnesses of risk control are stops and diversification and position sizing. They typically have nothing to do with the ‘sport’ itself. You can make much more money not being diversified, not using stops, or going all in on a high conviction trade. Of course, you could also blow up. In rock climbing, the primary goal isn’t to get to the top of the rock face, it is to live to climb that rock face another day. The secondary goal is the sense of achievement of getting to the top. In trading, the primary goal should likewise be to come back the next day, the next year, and the next decade. It should be to survive any down drafts with proper risk controls in place so you can return the next day, month, or year. And here’s where it separates from climbing, because there’s no infinitely high rock face out there. Besides perhaps some non-linear facet to the overall enjoyment and sense of achievement you get form doing hundreds of climbs without a fatal one, you’re not compounding your success.

In investing, each successful ‘climb’ allows you to use those now higher assets to feed the next successful “climb”, compounding onward and upwards. A major slip or fall seriously injures that compounding. If you have no risk controls, you could ‘die’, falling all the way to the bottom. The better risk controls or the more active and instantly on your diversification is – the smaller your drop and the easier it is to climb back up to your previous level. That’s what it’s all about. Having the least restrictive ropes possible which allow you to climb as high as you care to, while keeping any falls you encounter as small as possible. That’s the holy grail we’re all searching for with diversifying strategies as are outlined here.

To have an investment or asset allocation strategy is to do that El Capitan climb every day, night and day, rain or shine, snow or sleet, for the rest of your life. It’s doubtful even Alex Honnold would take on that risk. Surely, you want some ropes and safety protocols and backup plans in that scenario. It’s a long way down.

Debt, Dollars, and Deficits with CME’s Blu Putnam

It’s a job all in itself to be able to look at data – especially data that affects all of us on a daily basis – and be able to interpret that to make sense to yourself. Take that and have to turn it into something that makes sense to everyone else – well that’s a gift.

And we’ve got the most gifted of them all joining us on The Derivative – CME Group’s Chief Economist Blu Putnam. We’re lucky enough to have Blu on today’s episode breaking down all that’s going on in the craziness of what we’re living through in 2020.

We’re getting outside the charts and into the conversation surrounding sailing in the Chesapeake, the U.S. dollar trending, the future of technology and small businesses, inflation during and post-corona, fed funds rate to ZERO, effects of printing more money, “coordinated” monetary policy, , the outlook on the remaining 2020 economy, gold rallies, the fed’s pandemic reaction, trading Bitcoin futures, signposts of inflation returning, and Blu’s favorite Chicago pizza – his wife’s.

Listen to the entire episode on your preferred platform:

 

 

Chapters:

00:00-02:18 = Intro

02:19-7:58 = Background & the CME Group

7:59-23:35 = U.S. Dollar Index/The Fed & the Yield Curve

23:38-43:11 = The Dollar & What markets are currently in play

43:12-57:47 = Gold, Silver, what about Bitcoin? / The Fed Rate & Inflation

57:48-1:07:28 = Last thoughts on the U.S. Economy

1:07:30-1:10:39 = Favorites

 

Follow along with Blu on Twitter and LinkedIn.

And last but not least, don’t forget to subscribe to The Derivative, and follow us on Twitter, or LinkedIn, and Facebook, and sign-up for our blog digest.

 

Managed Futures Loves a Trending USD

What do you get (besides a gold and silver rally) when you do $3 Trillion in stimulus, and the Euro countries find out they can do a coordinated monetary policy? A U.S. Dollar sell off! After spiking from around 98 up to 104 in the depths of the crisis, the U.S. Dollar has sold off rather heavily, falling down to 92 (as of our writing this, we have a knack for inadvertently calling a bottom as soon as we write up something about a market).

What’s happening? Well, if you’re scared that Trillions in stimulus makes runaway inflation a possibility, lessening the purchasing power of your fiat currency, you sell dollars and buy gold (or Silver, or Bitcoin). If you think the Eurozone has figured out how to all coexist and are stronger together than they are apart, you sell dollars to buy Euros, and so forth. The common denominator, is selling dollars.

 

What is the Dollar Index?

Ice Futures has a nice explanation of their US Dollar Index Futures here:

The U.S. Dollar Index (USDX) is a geometrically-averaged calculation of six currencies
weighted against the U.S. dollar. The U.S. Dollar Index was created by the U.S. Federal
Reserve in 1973. Following the ending of the 1944 Bretton Woods agreement, which had
established a system of fixed exchange rates, the U.S. Federal Reserve Bank began the
calculation of the U.S. Dollar Index to provide an external bilateral trade-weighted average of the U.S. dollar as it freely floated against global currencies.

Which currencies are included in the U.S. Dollar Index?

The U.S. Dollar Index contains six component currencies: the euro, Japanese yen, British
pound, Canadian dollar, Swedish krona and Swiss franc. Before the creation of the euro, the original USDX contained ten currencies—the ones that are currently included (but not the euro), plus the West German mark, the French franc, the Italian lira, the Dutch guilder, and the Belgium franc. The euro replaced the last five of these currencies.

Before the creation of the euro, which now accounts for 57.6% of the USDX, the weightings of the five historical European currencies were: German mark (DEM), 20.8%; French franc (FRF), 13.1%; Italian lira (ITL), 9.0%; Dutch guilder (NLG), 8.3%; and Belgium franc (BEF), 6.4%.

Specifically, the index finds the weighted geometric mean against the six different currencies. However, not each currency holds the same weight. As ICE points out above, the Euro holds a 57.6% weight, while the other weightings are JPY = 13.6%, GBP = 11.9%, CAD = 9.1%, SEK 4.2%, CHF 3.6%. So, with the Dollar Index having the exchange rate with the Euro Currency for more than half of its composition, it’s only natural we see U.S. Dollar Index Futures falling while Euro Currency Futures are rising. Indeed, our quick back of the napkin math tells us it would be quite hard, mathematically – for the Dollar Index and Euro Currency to move in the same direction.

Why are Managed Futures Excited?
Traditionally, a rally in the Dollar Index has proven to be very beneficial for Managed Futures. That’s because it typically means the other currency markets are also moving with the same sort of depth. The other part of the reason managed futures tends to do well when the U.S. Dollar is trending, is because the U.S. Dollar index impacts almost all commodity futures markets simply because those markets are priced in the U.S. dollar. That means, for example, a falling U.S. Dollar can translate to rising prices in dollar denominated futures markets (all else being equal).

Here’s a look at the historical performance of Managed Futures (as measured by the SocGen CTA Index) has performed in different Dollar Index periods of strong trendiness, which we measured by the 14 day ADX indicator seeing values greater than 40, and then looking at the percentage of days the indicator saw such high readings each year. Here’s what we found. Managed Futures love it some strongly trending USD, with all but one year in which more than 35% of days were in strong trend seeing gains (90% of time), versus just 60% of the time when there weren’t as big of a percentage of strongly trending USD days. What’s more – the upsides were completely different, with the trending USD periods seeing a much higher ceiling for their performance (40% of the time with double digit years) versus 0% of the years seeing double digit gains when strong trends in the USD weren’t as frequent. All in all, in the strong US Dollar trending years, we saw a max of +15.25%, min of -2.87% and average year of 8.22%, versus a max of 6.26%, min of -5.83%, and average of just 0.42% in the other years.

So bring on that U.S. Dollar weakness. CTA’s will welcome it with open arms.