5 Thoughts on the Stock Market’s -7.5% Correction

  1. Why is ANYONE surprised?

This has been the most hated rally of all time, as quoted by Barry Ritholtz, The Wall Street Journal, and CNBC; with seemingly many more people doubting its ability to survive than actually participating. What’s more, this thing was getting very long in the tooth – 68 months and 197% off the March 2009 lows as The middle of September, and 17 months since the credit crisis losses were erased with a new all time high in March 2013.  Compare that with an average bull market move of 103% and 30 months off the lows, and 18% and 14 months from new highs to the eventual peak, and you can see we were due. It’s also worth noting we’re basically flat on the year after this “correction”… no gains, no losses. While hard to believe after the past few years – the stock market does have losing years. Let’s repeat that:  In distant times (like ancient 2011), there were entire 12 month periods where stocks didn’t end higher than they started a whole year ago… Quelle Horreur!

S&P Bull Run 1 (Disclaimer: Past performance is not necessarily indicative of future results)
Data of S&p 500

  1. Short Bonds if you dare…

We’ve also been due for interest rates to rise, and a lot of smart people have bet a lot of money on that happening (including one Bill Gross, whose wrongness there no doubt led to his eventual exit from Pimco). But this is the new widowmaker trade. They are carrying people out in bodybags from this one, as every head fake lower in bonds results in violent upswings.  Despite us being 6 years past the credit crisis – when everyone though rates would be going back up by now, 30 yr US Bonds have dropped from around 4% to nearly 3% this year, with bond futures prices shooting up about 7.5% in the past 20 trading sessions. There’s some programs killing it on this trade, but there’s also a lot of pain and debris left over from bonds once again moving higher (rates lower).

  1. Managed Futures have been waiting for this…

September was great for managed futures, and we’ve been cheering stocks to zero so far in October, because this type of environment is what managed futures lives for. It’s been a quiet few years of waiting for a volatility expansion like this for managed futures strategies, most of which essentially bet on outlier moves like this one happening, not just in stocks, but in bonds and currencies, and the rest. The ability to be able to go long and short – combined with the ability to be in markets like bonds, wheat, and even stock indices – means these types of moves can be captured. Now, there are likely to be whipsaws and the potential for lower volatility ahead… just like the stock market, volatility can’t keep rising day after day; but every manager we talk to is very excited about this new market environment.

  1. This is why you diversify

If this type of market move scares you – remember this is why you diversify; even when that strategy has been getting it’s ass kicked the last 5 years. Those who are diverisified and missed out getting the full return delivered by stocks the past few years realized that diversification isn’t in place for what is going on today, but for what may come tomorrow (tomorrow is here). They realized that the choice to diversify can mean accepting smaller positive returns today in return for smaller negative returns tomorrow.  At the end of the day – this isn’t just about the final return – it is about the journey as well. It’s about avoiding the swamps… as the Abraham Lincoln quote in the movie Lincoln illustrates:

“A compass, I learnt when I was surveying, it’ll… it’ll point you True North from where you’re standing, but it’s got no advice about the swamps and dessert and chasm that you’ll encounter along the way. If in pursuit of your destination, you plunge ahead, heedless of obstacles, and achieve nothing more than to sink in a swamp… What’s the use of knowing True North?”

Just owning stocks and hoping the market goes up indefinitely is akin to just plowing straight ahead with your Compass pointing North. We’ve landed in stock market swamp… You going to go through it, or diversify your way around it?

  1. This is proving time for Liquid Alts

There’s been a huge influx of mutual funds offering hedge fund like strategies such as long/short equity and market neutral, as well as managed futures mutual funds and ETFs that have come to market since 2008. This is the first real proving ground for those products, and the volatility and stock market losses should really start to separate the proverbial wheat from the chaff. It will be quite interesting to see who delivered on their glossy brochure promises and who didn’t when the dust settles.

 

 

 

 

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Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

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