I return to my turret following a few personal days -- one of our close friends celebrated her 40th birthday in Miami -- and I'm raring to go on this fine Monday morning. While seeing old friends is good for the soul, QT with new friends is great for the spirit. This was the first trip we took sans kids, and while we missed them, it was excellent to vibe with my remarkable wife.
From the looks of it, the mainstay averages continued to do the 2014 voodoo -- running to stand still -- while there were plenty of alpha bits (read: movement in individual names) that have paradoxically created a bear market in high beta with the S&P (INDEXSP:.INX) a kitten's whisker away from all-time highs. One (or both) of these trends will soon shift, so we would be wise to remain on our toes as we enter the seasonally important month of May.
The question on everyone's mind is which way these dueling dynamics will resolve. Revisiting the SMART money chart we've referenced several times over the last few weeks, and absent sudden and violent end-of-day bullish shifts (which is possible), a snapshot of this proxy continues to suggest, "PAY ATTENTION OR YOU MIGHT GET SMOKED."
Click to enlarge
Of course, given the five-year parabolic frolic, and judging from the depressed levels of volatility -- CBOEO EX implied Volatility (INDEXCBOE:VXO) 11ish -- the bears are a modern-day equivalent of the boy who cried wolf.
VXO since inception
I continue to trade surgically while keeping my powder dry. I still sense GW Pharma (NASDAQ:GWPH) trades triple digits all else being equal -- plenty of research supports the idea that CBD works in schizophrenia and diabetes -- but after the stock ran 70% in a few weeks, I peeled off all but a small token position so I could watch it digest.
My guttural sense that the tape has a gut check coming factored into that decision, but take that for what it's worth, which is one man's humble opinion.
One last thought on volatility, which has seemingly compressed across asset classes. I don't think this is a coincidence: In our interconnected world, global asset classes are tied together in some way, shape, or form. It stands to reason that as volatility in one complex is muted, it transcends others.
Conversely, when we see volatility pick up -- and that could happen at any time -- we'll see that spread like wildfire around the world. The time to prepare for that is before it happens, via right-sized risk and particular discipline in your approach.
The 'Flation Debation!
Over the last few years, we've maintained that we've experienced bifurcated 'flation. We have inflation in things we need -- health care, food, education, energy -- and deflation in things we want, such as cell phones, laptops, and plasma TV's, which have become commoditized as a function of the most deflationary invention of all time, the Internet. That latter dynamic is great if you're a consumer, but it's not so hot if you're a provider of those products, as margins get squeezed.
I stumbled upon a chart last night that sums this up with a neat little bow.
Click to enlarge
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Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at firstname.lastname@example.org.
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