Traders continue to hedge

The S&P 500 has now gone 41 days without a 1% move-the second most days without since 1996. How I have traded this anomaly, what I have learned, and how to trade going forwards.

First, let me try and put this lack of movement or complacency in perspective and take a few widely followed stocks, reasonably volatile, in 3 major sectors, all in the S&P 500. You all know them …AAPL ($108) GS ($170) and XOM ($88). A 1% move in AAPL would be $1.08. The same move for GS would be $1.70 and XOM $.88. So to say that for 41 trading days and may I add that within that time we have had MAJOR earnings releases, an ever so sensitive US jobs #, two speeches by Fed Chair Yellen as the interest rate debate goes on, a post Brexit hangover (although FTSE and DAX will disagree) and wild swings in FX markets, that AAPL has NOT had a $1.08 intraday move or GS a $1.70 move is astounding, to say the least. Side note: The pending US Presidental Elections add increased uncertainty and as we all know the markets disdain change but some argue a Clinton victory priced in but even so it’s eerie.

This is ever so evident in the price action and chart of the VXX and the more ‘sexy’ trading vehicle UVXY (all above equities are on NYSE/NASDAQ) in what many experts are calling this the most hated/boring rally of all-time as many if all indices hit new highs and complacency at an all-time low. To digress, the VXX provides exposure to S&P short term futures of 30-day volatility. Many use it for a hedge or protection but the more rogue traders trade the UVXY to try and time the market, a ‘no-no’ right there.

With this recent lack of volatility I am finding many many traders, myself included, are breaking major disciplines and developing bad habits. In modesty set aside, my edge here is that after two decades of trading, my rules that I have been taught and learned HAVE turned into habits and habits are much harder to break than rules. The number one rule being broken is selling winners and holding losers…or even worse, ADDING to losers. Many traders are becoming ‘investments’. My holding times have increased as well but it is my model to be mixed or be on both sides of the market.

This has become a stock pickers market and my trading principles are always predicated upon price action/volume/ and range so when the markets only have less than a 1% range on a daily basis, if you have a loser, there is very little forgiveness and in this uptrend, losers, especially on the short side get worse which is why holding winners and selling losers has been working. The problem with the VXX and more specifically the UVXY is that it has been a poor market indicator and a poor hedge. Many traders have been averaging down on this vehicle while taking profits on their longs leaving most hoping for a selloff or correction. Even more so the market has to correct in order for the VXX and/ or UVXY just to get close to breaking even.

The best traders wait for the ideal opportunity so the way to play the market now is to be stock specific. Many stocks have 5-10% range moves. My traders and my peers will wait to REACT instead of anticipating or timing the market. Before I make my next point on how I will handle volatility (it will come back) is to keep in mind a very simple trading cliche’, “one day doesn’t make a reversal in the markets. When the market(s) do have a range greater than 1% for the day, and I doubt it will move 1.2% per se, it will be a precipitous one and more importantly will look for the sector rotation and which stocks close good/poorly on high volume and range. I will wait for confirmation on any type of move outside these ranges, let the market settle, and then make my plays. Something will give one way or another but until then will stick to my rules and principles to what got me here. Trade well.

Michael Venezia
Head of Trading

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