Daily Market Update – March 19, 2014 (Close)
With what appears to be a day of relative quiet coming from Europe and not too much expected from the FOMC minutes the only thing capturing attention today is the prospects of Janet Yellen having a slip of the tongue during her first post-FOMC release press conference.
Although I was listening, I’m not certain of what she said that at 3:04 PM EDT set off a massive sell off. Looking at this minute by minute chart of today’s trading, you don’t see many precipitous drops like the one in the late afternoon.
We’ve started taking these press conferences for granted, but it wasn’t too long ago when we were all shocked when Ben Bernanke announced that he would hold a first ever such press conference. Given the very precise and methodic way in which Bernanke weighed each word, he could have spoken daily without spooking anyone unless that was his intention.
Now there’s clamoring for the press conferences to become a monthly event despite the fact that it hasn’t really yielded much in the way of new or market moving information.
At least if you ignore today.
Although there are people hoping for some new information to be passed along, even if unintentionally, the past hasn’t indicated that to be the case, but the past has only included a single individual in control of the words.
I didn’t expect much different from Janet Yellen. It would be hard to imagine that after so many years of public exposure and lots of opportunities to have provided unintentional information that she would start doing so today. However, her precision in defining the time frame of actions related to interest rates may have caught some by surprise. She put, what some may interpret as a concrete time frame of 6 months for rates to rise after Quantitative Easing ends.
There was confusion regarding her precision and then her imprecision in referring to whether referring to this year’s fall season or next year’s. That’s because QE is likely to end in January 2015 and one would have interpreted her initial words to mean that interest rates would be expected to rise some “considerable time” thereafter. However, she then referred to that time as “this fall,” instead of “next fall.”
That reportedly got traders or their algorithms nervous.
Coming up to the mid-way point of the week I’m not seeing very many more new positions for the week but am hopeful that there are more opportunities for getting new cover and hope to see a reasonable number of assignments as the monthly expiration comes to a close on Friday.
For those having done this long enough you do know that even when there is nothing new in an FOMC release that doesn’t mean that the market will just find itself in a big yawn. Sometimes the reaction is really inexplicable.
Today was just one of those times, but it was pretty orderly, even though it did reflect a nervous market.
What can make those kind of moves especially frustrating and maddening is when that inexplicable reaction occurs just days before that expiration, especially a monthly expiration and serves to steal your fantasies of being awash in assignment cash and rollovers.
Never take anything for granted; don’t count your chickens before they’re hatched; or whatever aphorism you prefer, but there is a lot to be said for that warning.
For that matter that may also apply to the belief that absolutely nothing of news will come from today’s events.
You never do know until it’s all said and done.
Heading into the monthly close I am still optimistic regarding assignments and maybe even some additional rollovers to help next week get off to a decent income flow start. Today turned out to be a quiet day other than for the past 56 minutes.
While the first two days of this week have been a good antidote to the successive losses of last week, it has removed some of the ability to spend on new positions. Who knows, maybe the final hour’s sell-off created some new opportunities, but I didn’t really have the desire to test the market.
While still optimistic that the market may go higher, based on the volatility pattern I mentioned earlier in the week, I did take the opportunity yesterday to purchase some portfolio protection in the form of a Volatility ETN.
On the one hand while low volatility causes low option premiums it also makes such insurance relatively inexpensive.
In this case I purchased iShares S&P 500 Short Term Volatility ETN (VXX) at about $44 and sold January 2015 $100 calls.
For those that understand the ETN vehicle, they really aren’t meant for long term holding as they get re-balanced everyday and can lose some value each time. Compound that loss over time and it can add up even if your directional bet is correct.
The Volatility ETN acts as portfolio protection because it tends to move higher when the market moves lower and it tends to do so in a leveraged fashion, so you buy a position that is much less in overall value than your typical new position. For example, a 1% decrease in the market may show a 5% increase in the Volatility ETN. In that case your portfolio will show a smaller loss. How much smaller depends on how convinced you are that insurance will pay off and at what levels you are willing to purchase it.
I didn’t purchase very much but may add even more if volatility gets even cheaper, especially if heading back to about the 2 level on the underlying index.
The use of this kind of portfolio protection is just like any other kind of insurance. Sometimes you’re happier if it never gets used, but it does represent a cost and detracts from your overall ROI if purchased.
Purchasing the protection is an expression of bearish sentiment, but at some point if shares are inexpensive enough you can dally with it without really making a strong statement regarding your sentiment.
Or you can look at it as simply hedging your hedges and then take it to yet another derivative when you also sell calls on the hedge. Whatever its use, these volatility products are very high maintenance and can lead to disappointment on their own, so know about it, but don’t go rushing in to any of them.
PS: The early morning version of the Daily Market Update referred to Janet Yellen in a gender specific fashion that was pointed out by one reader to have been incorrect. In fact, it is inappropriate to refer to Janet Yellen using the word “his,” although if you do close your eyes she does sound like Woody Allen.