Market Sentiment (Stocks on NYSE, NASDAQ, AMEX)

Dec. 22, 2015, 10:35 a.m. EST

Will the volatility of volatility continue in 2016?

Watchlist Relevance

Want to see how this story relates to your watchlist?

Just add items to create a watchlist now:

  • X
    SPDR S&P 500 ETF Trust (SPY)
  • X
    Invesco DB Commodity Index Tracking Fund (DBC)
  • X
    iShares MSCI Emerging Markets ETF (EEM)

or Cancel Already have a watchlist? Log In

About Michael A. Gayed

Michael A. Gayed, CFA, winner of the 2014 Dow Award, is chief investment strategist and co-portfolio manager at Pension Partners, LLC., an investment advisor which manages mutual funds and separate accounts according to its ATAC (Accelerated Time and Capital) strategies focused on inflation rotation. Prior to this role, Gayed served as a portfolio manager for a large international investment group, trading long/short investment ideas in an effort to capture excess returns. From 2004 to 2008, Gayed was a strategist at AmeriCap Advisers LLC, a registered investment advisory firm that managed equity portfolios for large institutional clients. In 2007, he launched his own long/short hedge fund, using various trading strategies focused on taking advantage of stock market anomalies. Follow him on Twitter @pensionpartners and YouTube

/conga/trading-deck/bios/gayed_michael.html 303444
The trading deck is powered by

By Michael A. Gayed

Getty Images

I think a lot of investors and traders are more than happy to see this year come to an end. What finally ended up being the year the Fed hikes rates was nothing more than a sloppy mess of volatility and extreme divergences which frustrated bulls and bears alike. As I noted in my latest week in review, the volatility of volatility in 2015 has been nothing short of incredible.

The VIX Index on numerous occasions spiked, came right back down, and then spiked again with little to no pause in between. Broadly this made risk-management positioning frustrating for most given that there was no time to really position fast enough in either direction. The end result has been a ton of whipsaw movement in the S&P 500 /zigman2/quotes/209901640/composite SPY -1.80% .

"Insanity — a perfectly rational adjustment to an insane world."

—R.D. Laing

Of course, in markets outside of the U.S., risk has been much more pervasive. We all know about the devastation in commodity markets (in particular oil). Little appreciated is the sheer number of country indices trading below their 200-day moving averages, with most negative over the last six months.

Funny how people tend to think "stocks" are defined as the performance of the Dow Jones Industrial Average or S&P 500. Stocks are not 30 issues, or 500. When you talk about stocks, you need to think of all equity issuance globally, and the results this year have been wildly disappointing.

So the question now is what happens next year. Will the volatility of volatility persist and will divergences continue? The answer to that I think has largely to do with the yield curve. When looking at tens minus twos, we are at a very bizarre place in the cycle given that we are nearing the expansion low.

Why does this matter? Because if the yield curve flattens aggressively even further, the Fed is going to have an extremely hard time raising short rates, lest it risk a recession from their tightening against a bond market that is warning of deflationary risks.

There would likely be a severe correction in equities should this relationship really collapse further than it has, signaling extraordinary volatility (VXX) which Treasurys tend to signal for stocks (click here to download our award-winning paper for proof of this). However, if a reversal takes place and the yield curve begins to steepen, then a lasting bounce likely would occur in commodities /zigman2/quotes/205569319/composite DBC -0.09% , emerging markets /zigman2/quotes/201454250/composite EEM -1.46% , and high beta sectors /zigman2/quotes/210522198/composite SPHB -2.72% .

Which will happen? The good news is that we will find out soon enough. Bring the insanity on.

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

US : U.S.: NYSE Arca
$ 438.69
-8.06 -1.80%
Volume: 135.34M
Jan. 21, 2022 3:12p
US : U.S.: NYSE Arca
$ 21.97
-0.02 -0.09%
Volume: 2.30M
Jan. 21, 2022 3:12p
US : U.S.: NYSE Arca
$ 49.00
-0.73 -1.46%
Volume: 34.77M
Jan. 21, 2022 3:12p
US : U.S.: NYSE Arca
$ 72.47
-2.03 -2.72%
Volume: 1.09M
Jan. 21, 2022 3:12p

Page 1
This Story has 0 Comments
Be the first to comment
More News In
Trading Deck

Story Conversation

Commenting FAQs »

Like & Follow The Trading Deck

/conga/commentary/columnist-competition/looking.html 234011

Partner Center

Link to MarketWatch's Slice.