What a week.
There are lots of statistics and factoids being tossed around this week.
Every one of them is pretty fascinating and each one lasts in the apses of my mind for about a second.
None of them are very important and none of them are worth remembering, because there is very little in life that isn’t transient.
Just when you think yu’ve seen the depths comes something lower and just when you think you have found paradise, somes a realization that it can then never get better.
But it does,
So the very old phrase “This too, shall pass,” has lots of meaning.
For me, having a sizable cash position this past week was a good thing, just as it wasn’t necessarily a good thing while beginning the process of building up a cash reserve.
Back about 8 months ago I started the process of raising cash.
That process included not re-investing proceeds from assigned positions as readily as I used to do, but it also included the outright sale of positions, as I outlined in “Someday Began Today.”
Back then, I spoke about wanting to wait until the S&P 500 retraced to about 2375 and then beginning the process of re-investing proceeds, bit by bit, right back into index funds.
The difference is that the original positions, liquidated in 2 steps, was unhedged.
It was unhedged because with overall volatility so low, there was very little advantage to capping the upside on the overall market.
This week, right before the closing bell of what would be the second of the 1000 point declines in the DJIA for the week, I took some of that cash and put it back to work.
Unlike the liquidation, which was done in two aliquots, I only re-invested 25% of the cash available from that liquidation.
But I still haven’t gone to the next step, which is selling call options on those positions.
What I will do is to either wait to see if premiums continue to climb or if they do not, just let that initial 25% go along for the ride.
If volatility goes higher, that will likely mean that the market has headed lower.
In that case, it will probably be time to buy more index positions and then start selling those calls.
With all the talk about volatility, the best indicator I’ve ever seen that something is brewing, actually started occurring about 3 weeks ago and hasn’t received much attention.
That indicator is when the volatility index doesn’t do what it was supposed to do,
It is supposed to move in a direction opposite that of the broader market and usually does so in an out-sized way.
the out-sized move is really easy to see in the above graph, but there is something somewhat more difficult to see in the days preceding that spike in volatility relative to the S&P 500.
In the past few weeks there have been multiple instances of the market moving higher, but the volatility index not moving at all, or the market being stagnant, but with volatility rising.
That dissociation usually leads to something and whether by coincidence or not, it certainly has led to something since the third week of January.
The intra-day moves of the past week have been stunning and reminded me that my favorite period of time in the past 10 years has been during periods of really enhanced volatility.
Options premiums become equally enhanced and the longer term options look better and better.
If you are a buy and hold investor, why not take advantage of those nicer and nicer longer term premiums?
After all, this is “LEAP” to Profit and the timing may be getting better and better.