Signal du Jour - Skew trade in ARGT

Another stellar year or a spectacular crash?

The market is closed today in remembrance of Carter’s presidency. To be honest, this mid-week break is a welcome pause. It’s only January 9th, yet the tension in the marketplace has been relentless. Sure, the VIX isn’t above 20, but daily realized volatility remains elevated, and the constant market chop is undeniably exhausting.

Here’s a timely reminder: staying on the sidelines and waiting is perfectly fine. Nothing forces you to put on a trade, especially when all the conditions aren’t met.

Speaking of patience, today we’re steering away from U.S. equities. With the NFP on Friday and earnings season about to kick off, we’re confident that prime opportunities will present themselves in just a few days. Meanwhile, we’re exploring a potential trade in ARGT, the ETF providing exposure to Argentinian equities. Let’s dive in.

The context

Long Argentina was one of the standout trades of 2024 for international investors. A country plagued by decades of inflation and stagnation made a radical choice in the last election, electing the unconventional Milei as president. The financial community took note: more accustomed to haircuts on their bond holdings and endless refinancing negotiations, money flowed swiftly back into the market as the new president followed through on his promises to cut government spending and open up the economy.

Of course, the stock market’s performance doesn’t entirely reflect the reality on the ground. Methods and policies can be debated endlessly. Yet, even with significant challenges ahead, something seems to be working: inflation has disappeared, and the deep economic downturn predicted by traditional Keynesian schools hasn’t materialized.

Yet, everything remains fragile, and Argentina continues to face significant challenges. This fragility is reflected in some of the wild swings observed throughout 2024. As we write this article, 30-day realized volatility has climbed back above 30—the upper bound of the range observed over the past two years.

Realized volatility has been on the rise since Q4 2024.

The prospect of a Trump presidency adds another layer of uncertainty, stirring turbulence for economic partners globally. For Argentina, this could put its fragile recovery at risk. Our models do not indicate a severe acceleration of recent market movements. Things will likely remain steady as we await greater clarity on the country’s economic trajectory.

Realized volatility should stay elevated in ARGT over the next few weeks.

So, what’s in store for 2025? Another stellar year or a spectacular crash? That question has fueled the recent turbulence in Argentina’s options market, creating potential opportunities for us to explore.