As we work our way through the last week of summer, we know that trading volumes should be lighter and should stay within a tight trading range. The traders sitting at the controls were likely told not to let the market fall apart while the higher-ups wrapped up their vacations. Today I want to cover some recent emails I’ve received and then look at why we have an increase in volatility.
First, I want to address some emails that came in over the weekend. They vary, but the essential theme is asking me what to do now because I have been writing about hedging for about two weeks, leading into the Jackson Hole symposium, and then not only did the market not fall 3%, but the market rose on Friday and Monday.
As you can see, just after I started recapping John’s hedging techniques and started warning investors about Jackson Hole, the market went up. While Friday started off lower when Powell started talking, it closed higher on the day.
Then the emails started coming in saying people hedged and lost money! Well, here are a couple of things to remember, things to watch out for now, and things to do in the future.
Remember – hedging is not intended to make you money (it’s not a lotto ticket) and you should be using money that you are okay losing. If you go back and reread what John wrote, he said that hedging is intended to save your account from losing as much as not hedging.
I then added that you should think of it the same way you would car or home insurance. You don’t get mad when you buy flood insurance and you make it through flood season without using it. Did you “waste” money? I’ve had a flooded basement twice and I’m never mad when I make it through a flood season without a flood. Yes, I spent money on something that I didn’t use, but it’s not a waste of money.
What should you do now? The last two positive days do not mean we’re out of the woods – more on that in a second. We still haven’t cleared the high from last Thursday and you can see a resistance area (horizontal box in the previous chart). You can also see from this chart that the S&P 500 (SPY) hasn’t crossed above its 50-day moving average and is still in a downward channel, so you may still get use from your hedges. Or you can close the hedges and recoup some money.
Next – what should you do in the future? Remember this feeling. If you’re heartbroken over the loss of money due to a hedged position for the purpose of protecting your overall portfolio, then either you shouldn’t be hedging at all or maybe you bought too much (insurance). Trading is a personal experience and you need to do what is best for you.
Ok, enough of that for now.
Let’s talk about the volatility that has entered into the market. Investors have been spending most of 2023 assuming, or pricing in, an economic soft landing. Negative news, namely disappointing growth data, a bounce back in inflation, and Fed Chair, Powell’s hawkish speech as he threatened more rate hikes and reiterated that the Fed will hold rates “higher for longer” to be sure inflation returns to its 2% target, helped push volatility higher over the past month.
The volatility index rose roughly 30% from the beginning of August, and even though it has fallen over the last few days, it still remains higher than the start of August.
I would look for this trend to continue into September when more volume enters the market. This will mean more choppy trading conditions as bulls and bears fight for control, going into the final quarter of the year.
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Jeff Wood
Editor, Filthy Rich Dirt Poor
Coach, Options Testing Lab
Any trade or trade idea discussed is for educational purposes only. They will not be tracked as an official trade recommendation.
