Forward Note - 2023/12/17
Forward Note - 2023/12/17
Jingle Bells, Jingle Bells, Jingle all the way to the market's closing bells.
A big thank you to our new subscribers – your enthusiasm and sharing are helping Sharpe Two gain traction! Stay tuned for a special Christmas gift at the end of this note
This year, the Santa Claus Rally took off a bit earlier than usual, and it's not just because of global warming nudging Santa out of the North Pole ahead of schedule. It's all thanks to the Fed signaling to market 'ground control' that after a steep ascent in rate hikes to navigate the inflation storm, we're likely to begin a gradual descent in 2024.
You could almost hear the collective sigh of relief amongst the flight attendants. In business class, fund and money managers were toasting with champagne branded ‘Magnificent 7', while those in economy seats were more than relieved to ditch their uncomfortable, albeit necessary, oxygen masks.
Why the oxygen masks, you ask? Well, cruising at dangerously high interest rates is akin to an economic 'death zone' – a place you don’t want to linger in for too long.
Remember the dire fate of SVB, Signature, and First Republic Bank earlier this year? That's the turbulence encountered when rates soar high – liquidity becomes scarce and costly, threatening the survival of the most vulnerable in our economic ecosystem, much like a plane struggling to maintain balance as the air thins at higher altitudes.
Are we clear of that perilous zone yet? It's hard to say for sure. We're not fortune-tellers, after all. But one thing's clear from Jay Powell's latest press conference – it wasn't just the usual autopilot talk; tune in to get a sense of what's on the horizon - the worst of inflation may be behind us, and it isn’t necessary to keep the economy on a tight chokehold.
And who knows, maybe this time, the central bank has successfully navigated us through the storm and, just maybe, is on course to deliver …
In other news, this Friday witnessed the largest triple witching in history, with over $5 trillion in options expiring. The markets weren’t spooked and closed in relative order, continuing a 7-week upward streak. The VIX remains comfortably low, suggesting a tranquil period for the next few weeks.
The volatility of the VIX (VVIX) did experience a slight uptick, a mechanical effect of the triple witching as risks are rebalanced across the expiration cycle. It's now hovering just below the average level of 91, which can be considered a return to a healthier state. In a later article, we will dive into how to use it as an indicator for volatility trade.
There's a chance that the end-of-year euphoria might be causing the market to downplay potential risks. But, as we often do, we're siding with the market's collective wisdom here – if the majority isn't worried about risks, they're probably not on the immediate horizon, except for the rare black swan event. Our suggestion until early January is simple: take a step back from the markets and cherish quality time with your families.
Thanks for sticking with us this far! Here are a few interesting reads from last week:
For the data enthusiasts among you, Netflix has unveiled viewing data for their entire catalog for the first time.
Don't miss 'A quant’s winter tale' by the Financial Times.
New to Sharpe Two and the world of volatility trading? Check out our piece on why predicting direction is hard.
And, as the year-end holidays approach, we still encourage you to take our Friday quiz on options – it's a fun way to test your knowledge!
If you are still here, consider upgrading to a paid account and unlock our full 'Signal Du Jour' collection. Dive into real data with us as we identify volatility trades boasting a high Sharpe Ratio – trust us, it's worth every penny.
And because all we hear these days are Christmas songs, we're unwrapping a special gift just for you! Get ready to elevate your options trading game in 2024 with an exclusive offer. Subscribe now and enjoy 50% off our Yearly Plan!
It's more than just a discount – it's your ticket to a year of insightful options trading and higher Sharpe ratios. Seize this opportunity to transform 2024 into a landmark year for your trading journey. If you enjoy our content, consider extending the offer to your friends.
By helping them to make better trading decisions, you are supporting us in our quest to improve the quality of trading analysis available to retail investors.
Happy trading,
Ksander