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Loss of Cabin Pressure

In the first quarter of 2012, the S&P 500 experienced an annualized volatility of 9.2%.  An expectation that ~67% of the days will have moves in the range of +/-.58%.  In reality, we had just 23 of the 61 (37.7%) trading days experiencing negative returns.  Of those negative daily returns the average down day was a paltry  -.37% and the worst down day was -1.52%.  With that euphoria we were able to witness a first quarter total return of +12.58%.

I bring up these stats because they certainly did not feel right to me.  When you express your thoughts on the markets and economy for free in a public forum you are almost certainly sure to receive a lot of negative responses from those readers who feel like you are an idiot (especially when your opinion dissents from their own).  As an example read the comments on my Feb 17 re-post titled “Not Long, Not Short, Not Participating” on

The premise for my feeling is that nothing has changed.  Global corporations have strong balance sheets, but that has nothing to do with the massive debt on developed nations’ balance sheets, high unemployment, a US housing market on life support, possible bubbles in the Asian tiger, and a crumbling Eurozone.  These types of issues do not disappear overnight or even in half a decade.  I often refer back to a very old Dec 2009 post titled “Expect the Unexpected“.  Specifically I refer to the last two graphs that show the one month volatility of the S&P 500 following the market bottom of the great depression and the one month volatility of the Nikkei following the bottom of the 1990 market crash after their own asset bubble.  The conclusion is that the market volatility will be sustained because the issues are deep and prolonged.

It is a losing proposition to forecast market outcomes, but I will throw one out there…that the European situation will hit crisis mode once again.  My specific market forecast would be a level of parity on the Euro versus the dollar:

One thing is certain, market volatility should provide opportunity rather than anger and arguments about which forecast is right.  The key is to make sure that you are not 100% long or short going into the change of market direction.  “Investing for the long haul” will come back when the issues have truly been resolved.


Posted in Economics, Markets, Trading Ideas.

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