The market continues to grind higher in a fashion we have not experienced in 21 years. It is a strange action as there is very little churning and a complete lack of normal fundamental or logical moves in the majority of stocks. The markets are being manipulated. Not that this is anything new (as this a normal part of markets). The problem is that there is NOBODY left on the other side of the upward grind. The complete lack of normalized differences of opinion are absent. The true volatility is being held in artificial check by the enormous proliferation of ETF's over the last couple years. We cannot overstate the impact this is having on the global markets across all asset classes. This is not rocket science. They are very easy to use, asset specific, and excellent trading vehicles. The ideal instrument for Algo trading platforms and HFT computer programs. It's easy and effective. The problem is this can make it very easy for indiscriminate moves in markets and individual stocks. The fundamentals and price actions are skewed. This also makes it extremely easy to manipulate trends and an excellent choice for "tape painting". We would love to run a few billion dollars in this environment - you can literally print profits. The thing is - if we did - we would be "painting a bull tape" in the midst of deteriorating global fundamentals while we accumulate bearish bets. When the spark that eventually reveals itself hits, we can pile on our bearish bets and "paint a bearish tape". This is legal and the tools are available. The financial IQ of the older generation of regulators are not accustomed to the new generation of traders who are running high-tech trading programs with a huge amount of assets under their control. This leaves The Fed and ECB way behind the 8 ball. When the U.S. markets turn, it will be fast, furious, and explosive.
We are not participating in the upward move at this point. We are not aggressively betting on a negative move either. We are slowly accumulating bearish bets at a slow and deliberate fashion as to let the bubble continue to inflate while limiting our downside. It is boring. We are playing for a huge pay-off on a vicious trend reversal. We are not confident; however, we have to play it this way.
Our strategy remains the same. We continue to buy volatility at record low prices. A slow and methodical process. We may miss the potential rise of the S&P500 to 2200; however, we don't really care. We may cut and run along the way. Eventually - without a doubt - this façade will end.
Paul Tudor Jones once said (paraphrase): He will attempt a trade;if he believes he is right, multiple times until the markets confirm his analysis or he recognizes he is wrong.
Of course, risk management and auto shut-downs are an integral part of capital preservation. We are convinced that we are right; however, we recognize the fact that we may be completely wrong;)
