The Market Recap: Russia, Volatility and Oil

Hello Flip users,

  The end of the quarter has come and gone. The S&P500 as given by the SPY as of now is down 5.7% YTD. The Nasdaq is down 12.1% and the broader market Russel 2000 is down 11% YTD and down 18% from its all-time high achieved in early November 2021. The Dow is down a mere 4.6%. I discount the Dow as meaningless other than that it is the de-facto index that investors “know”.

All of these indices are 50% of their lows achieved earlier in the quarter. The bounce was commendable. I fear, however, all the bounce did was prolong the hopes of the faithful and uninformed and refuel the evidence of those who are informed. Despite the “war” that appears to be going poorly for the Russians in the Ukraine and fueling the hopes that its end will bring a rally, I will point out that interest rates have spiked (prices have gone down hard) during this period. See below:

chart 1
chart 1

The above is a chart of the price of 30year bond futures. We all know that interest rates have gone up but the amount is staggering and I feel there is much, much more to come. Remember there is an inverse relationship with price and rate. The more the price goes down the more interest rates go up. I feel interest rates can easily go to “par” which in the case of the chart above means 100. That’s 6% and means 43 points lower, i.e. it can go down much, much more. I remember, being in my mentors office in February 1987 on 30 Broadway NY,  watching the bonds crater as they are today and the stock market continued to hold up. It lasted until October when it finally gave up the ghost and lost 20% — in 1 day. My mentor on that day became a billionaire at the age of 36. His name is Paul Tudor Jones.

Here’s is a chart of the S&P over the same 10 year period:

chart 2
chart 2

I suspect sometime this year we could see the price of the S&P cut in half. That’s right, in half. It could lose more than 200 points in the SPY (Spyder). There is no way that the current environment has tailwinds worth exploring i.e. staying LONG. I will put aside the socio-political crisis this country (and the world) faces and focus on the known fact that we are in a period of global inflation, supply chain problems, rising interest rates, a Fed that is behind the curve and a potential housing bubble despite the lack of supply. Under these circumstances it seems prudent to step aside and let things unfold.

I remember this. I remember what happened and kept the market subdued for 3 years after the 87 crash. There was an enormous opportunity created when the market fell but very few had the cash to take advantage of it. For those in Flip my hope is that we have both the courage and the cash to take advantage of the opportunity that I feel strongly is on the horizon. Old Bull markets Die hard. This will be no exception. This explains the rally we just saw having the losses we saw earlier in the year. But time has a way of decaying optimism if no new highs are achieved.

In regards to Flip products:

 Many systems have returned LONG as evidenced in the recent purchase of the S&P. rest assured these positions have tight thresholds and would be out quickly on any down move. Also, notice that many systems have traded frequently and have been choppy. This happens when the systems are going through transition. Given the market has had a large bull run over the last few years it warns me that evidence is mounting for a significant sell off. I will NEVER tell anyone to go out and sell, that’s why we use these systems. They may get beat up for a few rounds but in the end they are designed to “outlast” their opponent. The opponent is Buy & Hold. So as is often so hard to do, now more than ever we must stick to our money management methods that are built inside our products and “trust” that they will out-perform if what’s stated above comes to be true.

A further Note on OIL

I feel remiss to NOT talk about Oil given that prices have become so high and contribute largely to the inflation we all have come all too familiar with.

Here’s a chart from Trading Economics™

chart 3
chart 3

I want to note to our users that the odds of oil being a temporary supply chain problem is unfounded. Put the war aside and even the current administration’s lack of understanding of “Econ 101” with regards to how Oil flows and how Oil companies use capital. Note prior to the financial crisis in 2008 (up to 140), Oil spiked; the look what happened after the market crashed in 2009 (down to 40); and finally and then look subsequently happened after the crisis was over (moved back up to over 100). 

The Oil problem is here to stay, and therefore so is inflation. Thus it remains prudent to still hold Oil as a position even at these levels even if the market moves significantly lower in the coming months. The reason for this is it takes time for Oil companies to ramp up their drilling and exploration even if the current administration were to do an about face on their war on fossil fuels which, at least for myself, feel is unlikely.

Until next time,
Kelly and the iFlip Team

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