If you happen to be consuming news this morning, you couldn’t miss the breaking news graphic dominating the screen, as the media extensively reported on the dive in the markets. You can tell it’s been a bad day when Speaker of the House John Boehner makes a point to comment on a bad market day. The Dow Jones Industrial is down over 200, the S&P 500 dropped below 1600 at one point, and commodities are taking a beating. Largest movers include Silver – 8%, Gold -5.75%, Coffee – 4.60%, Crude – 2.75%, Corn -1.30%, and Soybeans -1.00%. In case you want a visual representation, this sea of red should do the trick.
If you noticed, the only green you see is coming from the U.S. dollar, but it’s only up slightly. Is there a reason for the madness? Markets are down big across the board on the heels of comments from Fed Chairman Ben Bernanke that the Federal Reserve may start pairing quantitative easing later this year.
So what do the people invested in long-only commodity ETFs think when they see these moves? Do they ignore them? Do they think it’s just a temporary setback on the commodity supercycle highway? As we talked about in a recent newsletter, we just don’t get it. It’s like buying a car that doesn’t go in reverse… You have the pleasure of going fast, but a crash is almost certain.
As for managed futures, the end of QE could be just what the doctor ordered. CTAs, and trend followers in particular, have been lamenting the lack of directional volatility in the markets for years now. If a QE-ending downturn amps up overall volatility – we hope managed futures strategies are prepared to step up to the plate and provide the crisis protection they are known for.
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