Category Archives: etf

Crash Imminent Warning Removed By NIRP Crash Indicator

The NIRP Crash Indicator’s signal changed from its pre-crash or crash imminent Orange to its Yellow cautionary reading level on the close of the market on May 9, 2016. The signal had gone from Yellow to Orange prior to the U.S. stock market’s opening on April 28. During the eight day period that the indicator’s reading was Orange ended on May 9, 2016, the S&P 500 went from 2095.15 to 2058.69, a decline of 1.7%. The signal went to Orange from Yellow because the exchange rates of the yen versus both the euro and the US dollar had stabilized during the week ended May 6, 2016. Additionally, both the euro and the dollar appreciated by more than 1.1% versus the yen on Monday May 9, 2016. Please note: For the NIPR Crash indicator to change from the crash imminent Orange or a crash Red reading to Yellow requires that the exchange rate between the yen and dollar be stable for an extended period of time or that the dollar and euro advance significantly versus the yen. An increase in the indicator’s reading from Yellow to Orange requires a steady advance or a significant one day advance for the yen versus the dollar. The NIRP Crash Indicator was developed in February 2016, from my research on the Crash of 2008. My research revealed the metrics that could have been used to predict the Crash of 2008 and its V-shaped reversal off of the March 2009 bottom. See my Seeking Alpha “Japan’s NIRP Increases Probability of Global Market Crash” March 4, 2016 report. The metrics are now powering the indicator. Information about the NIRP Crash Indicator and the daily updating of its four signals ( Red: Full-Crash; Orange: Pre-Crash; Yellow: Caution; Green: All-Clear) is available at www.dynastywealth.com . Since inception the NIRP Crash Indicator’s signals have proven to be very reliable. Throughout the entire month of March, the signal for the NIRP Crash Indicator had remained at the cautionary Yellow and the S&P 500 experienced little volatility as compared to the extremely volatile first two months of 2016. For the month of March, the S&P 500 increased by 4%. The indicator’s reading went from Yellow to Orange after the market’s close on Friday April 1, 2016 . For the following week ended April 8, 2016, the S&P 500 experienced its most volatility since February of 2016 and closed down 1.5% for the week. The signal’s second Orange reading occurred before the market’s April 28, 2016 open. From the Thursday, April 28 open to the Friday, April 29 close, the S&P 500 declined by 1.2%. The S&P 500 (NYSEARCA: SPY ) and the Dow 30 (NYSEARCA: DIA ) ETFs closing at their lowest prices since April 12, 2016 on April 29. See also my SA post “NIRP Crash Indicator’s Sell Signals Very Reliable for April 2016″ May 3, 2016. The primary metric powering the NIRP Crash Indicator are sudden increases in volatility for exchange rates of the yen versus the dollar and other currencies. The significant appreciation in the yen versus the dollar in 2008 accurately predicted the crash of 2008, and the recent declines of the markets to multi-year lows in August of 2015 and February 2016. In my April 11, 2016 ” Yen Volatility Is Leading Indicator For Market Sell-Offs ” SA post and my video interview below entitled “Yen Volatility Causes Market Crashes”, I provide further details on the phenomenon of the yen being a leading indicator of market crashes. The rationale for the for yen volatility or its appreciating significantly versus the dollar being a leading indicator of crashes is because the Japanese yen and the U.S. dollar are the world’s two largest single country reserve currencies. For this reason, the yen is the best default safe-haven currency utilized by investors during any U.S. and global economic and market crises. When crises unfold, historically the U.S. dollar — by far the world’s most liquid and largest safe-haven currency — is susceptible to dramatic declines until the storm has passed. Savvy investors know that the U.S. is, unquestionably, considered the world’s leading economy and markets. They know that upon a crash of the U.S. stock market, the initial knee-jerk reaction would be a simultaneous crash of the U.S. dollar versus the world’s second leading single-nation currency. The yen is currently the default-hedge currency. Even though the euro, arguably, ranks with the U.S. dollar as the world’s top reserve currency, it is not the preferred hedge against the greenback. The euro is shared by 19 of the European Union’s member countries that have wide-ranging social and economic policies, and political persuasions. For this reason, and also because Japan is considered to be one of the most fiscally conservative countries on the planet, the default currency is the yen. The U.S. dollar does not experience extended crashes versus the Swiss franc and the British pound during times of crises because each of the underlying countries has economies much smaller than Japan’s. From my ongoing research coverage of the spreading negative rates and the devastating effect that they could potentially have on the global banking system, the probability is high that the major global stock indices including the S&P 500 will begin a significant decline by 2018 at the latest. My April 11, 2016 article entitled, “Negative Rates Could Send S&P 500 to 925 If Not Eliminated” , provides details about the potential mark down of the S&P 500 likely being in stages. I highly recommend you also watch my 9 minute, 34 second video interview with SCN’s Jane King entitled “Why Negative Rates could send the S&P 500 to 925”. In the video, I explain the math behind why the S&P 500’s declining to below 1000 may be the only remedy to eliminate the negative rates. The video also reveals some of my additional findings on the crash of 2008. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Take The Long-Term View To Manage Volatility

By Tom Lee, Managing Director, Investment Strategy and Research, Parametric Volatility today is not materially above the long-term average. If we use the CBOE Volatility Index as a reference, volatility since the end of 2015 averaged a little over 21 ½. Long-term VIX averages in the high 19s. The reality is people think we are in a higher-volatility environment because we came from, historically, a relatively low-volatility environment. Volatility tends to cluster into regimes. The volatility environment we’re in now is more normal. What caused volatility to elevate? There are a lot of contributors to volatility. There are the experimental and divergent monetary policies that are being pursued across the globe, including negative interest rates. And there’s also an intuitive understanding that the longer we are in this experimental monetary policy phase, the higher the risk is of some unintended consequence. We’re going to have this uncertainty for a while. Asset allocation Having said that, I don’t think that volatility should drive changes in asset allocation. Volatility tends to cluster in regimes and it would be very hard for an investor to time an upward or downward move. I think investors should structure their portfolios for the long term. I would say that now is a very prudent time for investors to closely observe their portfolio and make sure they have transparency into all the risks they’re taking and address unintended risks. As an example, recently investors have become very interested in hedging their currency exposure – after the strong rally in the dollar. They’re hedging only after they’ve experienced the risk. We are advocates of investors trying to get ahead of the curve with respect to risk. Investors need to show fortitude as volatility picks up and not overreact to events in the market. Staying the course What can investment managers do? First and foremost, investment managers can come up with ways that help the client to stick to their policy portfolio. So, as an example, they can offer seamless rebalancing methodologies. Investment managers can be more transparent about their strategies. By this I mean every strategy has periods when the wind is at its back and periods where you’re running into the wind. Overall it’s helpful to be more transparent about what environments will be challenging for a strategy. And if managers are forthright with the client about this, it’s less likely the client is going to terminate them during a challenging period. Frequently, in hindsight, we see that these challenging periods were absolutely the wrong time to terminate a strategy. Low-volatility strategies Low-volatility strategies are always worthy of consideration but investors need to be conscious of what they’re getting into. Most strategies are constructed around two general themes, a risk metric construction process and a min-variance process. Risk metric just involves sorting the index by various volatility metrics. Minimum variance looks beyond risk metrics and incorporates correlations among securities. All low-volatility factor construction uses some type of concentration limits. You need to understand that these strategies don’t outperform in every situation, namely a down market. For example, the S&P 500 Low [Volatility] Index has underperformed the S&P approximately 15% of the time when the market was negative. So investors have to understand that they can have these downward surprises. If investors want to avoid these types of surprises, either asset allocation or diversification through the introduction of other risk premiums will provide them with greater certainty of low volatility when they most want it, and that’s in a negative market environment. Holding cash In regard to holding cash, I think it’s challenging for an investor in the long term. They are holding risk assets to fund future liabilities, which are growing faster than cash. Investors holding cash also struggle to realize when the market is bottoming so they can time their move out of cash into risk assets. If you are really thinking about holding cash as a modest form of protection, there are other strategies available. A very simple one is a disciplined covered-call selling program that will generate cash in a stressful environment and dampen some of the downside volatility. That, to us, would be more prudent than parking money in cash. Derivatives Derivatives can and have been used to control portfolio volatility. Historically investors have used long puts or put spreads to control downside risk in portfolios. I am generally not an advocate of this approach. It needs to be highly customized to the particular investor and it can lead to a lot of challenging decisions. How do you pay for the downside protection? Do you sell away upside? Experience shows that most investors become fatigued with the expense and tend to terminate programs, often right before a market experiences challenges. Options An alternative approach is to sell fully collateralized options. This approach seeks to capture the volatility risk premium, which is embedded in options. It often makes more sense to de-risk the portfolio and consider being a seller, rather than a buyer of the hedge. The first adopters of this type of strategy were endowments and foundations. More recently there is increased interest from Taft-Hartley funds that are dealing with particular pension funds and mark-to-market issues, as well as public fund investors. There are benefits of selling volatility in a transparent, liquid and fully collateralized manner. One preferred way of doing that is through index options and trying to capture what academic and market research has identified as the volatility risk premium. The result is that this premium can be captured in a transparent, liquid manner and it shows diversification benefits versus traditional assets. It can have a material and positive impact on a portfolio over time. Focus on the long term Many investors look at volatility and are fearful. They intuitively understand that rising volatility generally means more stressful market environments. Investors need to take a step back and focus on the long term, and not become reactionary or fall into short-term pitfalls and try to shuffle their portfolio to follow some latest fad. As markets evolve there may be better approaches available to them that allow them to achieve their ultimate objectives. So be open to new ideas. There’s a lot of really creative thought going on right now in different areas that maybe in a couple years will become more mainstream. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.