Forward Note - 2024/05/12
SOS - Smells Of Summer.
Sell in May and go away, they said. Volatility may have a completely different opinion on the matter, though.
As anticipated, realized volatility vanished last week after two weeks of turbulence. No "important" macro numbers, no FOMC, a few Fed speakers, and a couple of surprise earnings later, the S&P 500 lazily added 1.85% this week and the Nasdaq 1.5%. The VIX got crushed to one of the lowest points of the year at 12.55.
Who would have thought five weeks ago, when rockets were flying, and the index was flirting with the 20 handles, that we would be contemplating 12 for the May expiration? Certainly not us, and at this point, we are seriously tempted to think we may see prints below the 11 handles before we see 20 again.
Think about it - Monday, May 27, is Memorial Day, which means the week before will likely see very little activity on Friday. There are few "significant" events on the calendar—some inflation numbers next week, preceded the day before by a speech from Jay Powell.
But what could these numbers tell us that we don't already know? The same goes for the Chairman. No rate cut in June is now fully priced in, and the market seems more comfortable with the idea of no rate cut in 2024. When you replay the past nine months since September 2023, this sounds almost too good to be true. Yet, when you look at the MOVE index, which is the equivalent of the VIX but for bond prices, we are firmly at the year's lowest point. The Fed may or may not cut the rate: whatever, says the market.
There is always the risk that inflation numbers could pick up again. However, until proven otherwise, it is yet another risk that market participants assign only a very small probability of happening.
So what else? NVDA earnings, maybe?
No one has forgotten the 25% increase in value after earnings in May last year. Since then, NVDA has almost tripled in value. Surely, another surprise here could move the market a couple of handles up or down. It could, though, but will not necessarily do so, and thinking that a massive surprise to the downside will happen is not necessarily the best assumption when the major cloud providers have insisted on how computing related to AI has pushed their earnings upward.
We keep looking left, right, and center; it is hard to identify where the risk could come from, and as a result, it already feels a bit like summer. And what a busy summer it's going to be - the last Roland Garros for Nadal, the European Football Championship, the Olympics… ah .. we can almost already hear the crickets singing from the Côte d'Azur where we will be writing from in July.
Obviously, the minute you say that, something unexpected hits the newswire, and you now look like a fool because things get agitated again. However, until something happens, there is no reason to be worried: taking some risks off the table seems premature, and being long volatility … seems a little foolish.
So, what's left to do in such circumstances? Should we just read yet another analysis on what the Fed will do and the future of the US economy, or start anticipating the US elections?
Our number one piece of advice is to use that time to review metrics about your trading. It's been four months into 2024, out of which three had a very low volatility regime; you should have some interesting data to compare what you did well when things were calm**, as they are due to be in the next few weeks**, and make sure you do more of that. You should also know what didn't work well and what you should do less.
Looking for some ideas? Why keep buying them wings, for instance? This is one of the most popular topics on our Discord channel. Buying the wings greatly reduces margin requirements and assuages your perception of risk. But they eat into your profit margin more than ever when volatility is this low.
It's like going out to the beach (in the Côte d'Azur again) with an umbrella, a pullover, and a trench coat. You may still enjoy the view and the time outside, but your experience may be less enjoyable than your neighbors in swim trunks and a bikini.
In other news
Jim Simons passed away this Friday, and the trading world lost a giant of the field. At a time that celebrates Buffett, Soros, or even Griffin more recently, the founder of Renaissance Technologies enjoyed less fame and glory. Yet, his life is a novel in and of itself. A math PhD at 21, some significant contributions to the world of physics, a short stint at the NSA, a few trips by bike between Boston and Bogota, yet a fair amount of boredom, and a fund that would average 66% per year over the last 30 years. Some individuals are exceptional; Jim Simons was in a league of his own. And at a time when we glorify the "fake it till you make it" mentality, here is a good example of how a life lived in full can still be accomplished through a passion for one's work and away from podcasts and social media posts.
Thank you for staying with us until the end. As usual, here are a few interesting reads from last week:
Social media, as expected, has been abuzz with discussions about who would have had the best formula to pay tribute to Jim Simons. Yet, we found that the FT's sober and simple eulogy about him was the closest to what the man was—away from the froufrou and straight to the point.
The idea of having your phone stolen may very well have topped the list of day-to-day annoyances for most individuals. The FT went deep down the rabbit hole of what that means from a data perspective, especially with all these financial apps on our phones.
We didn't publish any educational pieces on Sharpe Two last week and are unlikely to publish one again this week. We are beefing up our new data infrastructure to come back with even better analysis, hopefully before the beginning of June. Thank you for your patience!
That is it for us this week. We wish you a wonderful week ahead, and in the meantime, don't overtrade.
Ksander
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