Rick's Picks
Monday, March 21, 2005
For investors who'd rather be smart than lucky
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Volatility's Death Spiral
It is a matter of record that America's economic recovery over the last four years has been little more than a statistical hoax. Although real GDP supposedly has grown by 10.4 percent over that time, economist Kurt Richebacher calculates that gains would be no higher than 4 percent if honest numbers were used. Instead, the government's spinmeisters continue to grossly understate the rate of inflation while using hedonic adjustments to turbo-charge reported gains in productivity. Dr. Richebacher says that such duplicity has been taking place on a breathtaking scale, causing, for instance, a 9.4 percent rise in business spending on computers over the last four years to become a hedonically enhanced 113.4 percent.
Each of us knows, through personal experience and anecdote, that the cost of living is rising much faster than the government would have us believe, and that good jobs are as hard to come by as they are to keep. But if the average American is working harder than ever merely to stay afloat, it is not clear how such feeble economic growth as we've experienced in recent years will enable said worker to extricate himself from a financial pillory, much less improve his lot.
Flaccid Market
This fact has not been lost on investors, as the stock market's flaccid performance over the last five quarters attests. But investors have not been the only casualty of diminished expectations, as witness the death spiral of the VIX shown in the chart below. Clearly, it is becoming increasingly difficult for traders and hedgers - the nimblest players in the investment world - to eke out a living. And if these intrepid souls can no longer cut it, what hope is there for the rest of us?
There are undoubtedly traders who would sacrifice their first-born just to have volatility return for even a month or two. But they should be careful what they wish for, since my hunch is that the moribund stock market is about to inundate us all with a volatility tsunami. Before that happens, though, we should expect the humbling process to continue, asphyxiating traders and hedgers just like the big winners of the tech boom before them. When the last hedge fund cries "Uncle!" the market will be ready to move.
We'll Stay Short
Of course, it's possible the process is already under way, begun when the broad averages topped on March 7. But the earliest sign occurred quite a while ago when, in late 2003, the VIX breached a hidden-pivot support at 14.79, sounding the death knell for traders and hedgers. The failure of this support hinted that volatility was about to fall almost literally off the charts. And so it has, causing whatever after-the-boom opportunities remained in the stock market to dry up like dew on cactus.
And now, if volatility is about to return, presumably in conjunction with a stock-market collapse, my guess is that it will be signaled by a close above 14.79 on the weekly VIX chart. We'll be watching closely, nursing the sixty QQQ puts we bought a while ago, when the index hit a minor peak . We are also short the S&P futures - from within a single tick of the March 7 top - and will use a very wide trailing stop, since, in my opinion, downside risk vastly exceeds upside potential.
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Rick Ackerman
March 26, 2005
Taming Mini-Futures
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Information and commentary contained herein comes from sources believed to be reliable, but this cannot be guaranteed. Past performance should not be construed as an indicator of future results, so let the buyer beware. Rick's Picks does not provide investment advice to individuals, nor act as an investment advisor, nor individually advocate the purchase or sale of any security or investment. From time to time, its editor may hold positions in issues referred to in this service, and he may alter or augment them at any time. Investments recommended herein should be made only after consulting with your investment advisor, and only after reviewing the prospectus or financial statements of the company. Rick's Picks reserves the right to use e-mail endorsements and/or profit claims from its subscribers for marketing purposes. All names will be kept anonymous and only subscribers' initials will be used unless express written permission has been granted to the contrary. All Contents © 2004, Rick Ackerman. All Rights Reserved. www.rickackerman.com
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