Friday the 13th
Vol #15- November 13th, 2020
I’m not the only one on the internet to point out that it’s Friday the 13th in 2020.
Superstition feels especially compelling when the world is filled with tumult. On our podcast a few weeks ago, Pomp even got me to consider believing in aliens.
Traders are a particularly superstitious bunch, trying to divine and augur returns from the market. Winning streaks might mean never changing your jacket or tie, and losing streaks come with anxious experimentation.
After the US election seemed clear, the markets breathed a bit of a reprieve and have rallied to near all time highs again. Yet dozens of states are tightening their restrictions due to pandemic outbreaks, and the president still hasn’t conceded.
Yet there are fundamental reasons why market indices continue to rally. We’ve had a persistently low interest rate environment, and in the medium term there is vaccine optimism. Technical market dynamics with volatility trading flows through the end of the year - large positions unwind and the calendar has more holidays - mean trends could get exacerbated.
These feel incongruous.
The truth about the markets is that today's price is everyone's combined best guess about what the future holds. If there was an obvious future result, everyone would make that trade and then the market would rebalance at the new equilibrium.
Rather than counteracting uncertainty with superstition, we look towards systems. Strategy Execution as a Service provides consistent and ongoing exposure. Whether you’re looking to diversify, amplify or protect, it’s important to stay involved with the market.
Rather than change our workout regime or try a new smoothie, we keep going back to our checklist. Friday the 13th just means another day of positions to roll and trades to make.
Thanks for joining us,
Mark Phillips
CEO
What clients are asking us:
Difference between an iron condor and a butterfly?
During our webinar earlier this week aout Market Neutral Returns we got a great question about the difference between an iron condor and a butterfly. While these two positions might look functionally very similar, there are interesting differences.
One major difference is that with an iron condor, your debit/credit direction also matches your volatility position - with a butterfly it’s reversed. To go short volatility you’d enter into a long butterfly, or a short iron condor.
Whether you’re collecting or paying cash to enter a trade has important risk management characteristics. In general we prefer the debit side, because the risk is most intuitive to fit into a portfolio.
Another interesting point that you can achieve with both an iron condor and a butterfly, is adjusting the width to aim for higher and lower risk reward payouts. The tighter and further out you try to pinpoint movement, the cheaper the odds are going to be.
Check out the full recording below to learn more!
Happy Friday!
Should we get the scaries from a Friday the 13th stock market day?
Overall the answer is no, stocks Friday the 13th don’t fare any worse than the average day in the stock market. Since 1928 there have been 152 Friday the 13ths in the calendar, and the market is barely positive- up .02% on average. This is pretty much in line with any other day of the year.
Perhaps the most significant day was in October of 1989, with major indices shedding 6-7% of their value that day.
On that Friday the 13th, news came into the market early on about the unwinding of the United Airlines buyout deal. While this was likely more precipitating than fundamental, the news shook investors as the end of the heady junk bond fueled buyouts.
Traders were also still trigger shy from the panic of the 1987 crash that was barely two years old and still stung.
Whether or not it was the UAL deal collapsing, there were other factors underlying the weakness of the economy, and the markets just needed a trigger. Low growth rates and the savings and loan crises were the more fundamental reasons that led to a stalling economy in the early 1990s.