- Weekly summary and recap.
- Analysis of major indexes.
- Popular ETFs.
- Sector, Factor and Asset ETFs
- Commodity ETFs.
- Spot currency pairs.
- Chart of the week
1. Weekly summary and recap
- U.S. stocks were higher on the week.
- High beta large caps rose.
- Bond yields were little changed.
- Commodities were lower.
- Crude oil staged a rebound.
- The U.S. dollar finished the week higher.
Recap (March 29, 2021 -April 1, 2021)
Large caps gained on the holiday-shortened week with S&P 500 rising 1.1% to new all-time highs. High beta large caps were up 1.4% on the week. Tech stocks gained the most with NASDAQ-100 index rising 2.7%. Commodities and gold ended the week lower. Bonds were mostly unchanged.
Nasdaq-100 and the Russell 2000 finished the week 3.5% and 4.5% below all-time closing highs, respectively. Low volatility large caps are about 6% below all-time highs. High beta large caps are up 24.6% year-to-date.
2. Analysis of major indexes
VIX fell 8.1% to close at 17.33 for the week.
Two weeks ago I wrote:
[V]olatility may decrease in the medium term and VIX may fall towards 2020 lows around 15 during the year.
The volatility mean reversion that started five weeks ago may continue this month. This has compelled some hedge fund managers to increase leverage to high levels. Recent news of hedge fund with leverage 5:1 getting liquidated is an indication that some are ignoring known unknowns because they are convinced volatility mean-reversion will continue for a while. S&P 500 direction is highly anti-correlated with VIX direction. As the chart below shows, daily returns of SPY ETF and VIX have an average 120-day correction of -0.77 since inception of former.
Expectations of volatility suppression through central bank policies have increased moral hazard and this is reflected in highly leveraged bets in the market. In the case of a white swan, high leverage may lead to a sharp market decline similar to the one in March 2020. Still some market participants are willing to take the risks of high leverage because this is probably the only way to generate alpha and increase their AUM. However, when leverage rises above 3:1, the probability of ruin increases significantly and for 5:1 ruin is almost certain given enough time. It is not that these smart people do not understand the math but the struggle to succeed makes them to ignore prudent risk and money management. But also the risks of those who employ good risk and money management are higher due to reckless behavior of some reckless market participants. Some seasoned traders try to gauge the “level of recklessness” and prefer to stay on the sidelines although this is an extreme decision.
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Specific disclaimer: This report includes charts that may reference price target levels determined by technical and/or quantitative analysis. No updates to charts will be provided if market condition changes occur that affect the levels on the charts and/or any analysis based on them. All charts in this report are for informational purposes only. See the disclaimer for more information.
Disclaimer: No part of the analysis in this blog constitutes a trade recommendation. The past performance of any trading system or methodology is not necessarily indicative of future results. Read the full disclaimer here.
Charting and backtesting program: Amibroker
Data provider: Norgate Data