The rampant positive mood of the prior months all but disappeared in April. The high point for the month in the S&P 500 came on the first day, and a steady decline then ensued, resulting in a loss of 4.2% in April. In another notable change, there were multiple days in the month with material declines: since the low in late October, the S&P has closed with a daily loss of -0.5% or worse on 22 separate days, with nine of those occurring in April. Throughout the month, a raft of price gauges showed higher than expected inflation readings, further dampening the hopes for rate cuts from the Federal Reserve. In fact, as of the end of April, Fed Funds Futures are pricing in one 0.25% cut by the end of 2024, marking a significant shift from the more dovish expectations of a few months prior.
Directional Spread Strategy
The Directional Spread Strategy was able to capitalize on this broad decline, as well as a sharp overnight drop when Mideast tensions heightened. We were able to monetize some ratio put spreads as the S&P continued to grind lower, and recorded a slightly outsized gain in April. Despite the overall decline, there was no single day of extreme losses where volatility surged; the VIX peaked at 21.36 but remained mostly below 20, indicating relative calm in the markets.
Tactical Program
The Tactical Program successfully leveraged the moderate volatility to find profitable trades. Even though the S&P had its worst return since September 2023, the decline occurred in a benign manner. This meant that even with a little volatility, our positions were far enough away from the market that our conservative hedge triggers were unbreached, allowing us to achieve profitability on all positions held. As the month ended, traders were looking forward to the Federal Reserve’s policy announcement and statement on May 1st . The shift toward increasingly fewer Fed rate cut expectations (with some commentators even calling for further rate hikes) highlights the divergence between the Fed’s priority of controlling inflation and the market’s desire for rate reductions. Years of an accommodative Fed have led to an expectation that rates will come off quickly, but inflation trends are not cooperating. The Fed has consistently emphasized the need for progress on inflation before adjusting monetary policy, a point seemingly overlooked by market participants. The upcoming Fed meeting may reinforce this stance and potentially lead to a revaluation of assets. In any case, we remain vigilant in our search for favorable risk/reward trades in this environment.
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. THE RISK OF LOSS IN TRADING COMMODITY INTERESTS CAN BE SUBSTANTIAL. YOU SHOULD THEREFORE CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION. THE HIGH DEGREE OF LEVERAGE THAT IS OFTEN OBTAINABLE IN COMMODITY INTEREST TRADING CAN WORK AGAINST YOU AS WELL AS FOR YOU. THE USE OF LEVERAGE CAN LEAD TO LARGE LOSSES AS WELL AS GAINS. IN SOME CASES, MANAGED COMMODITY ACCOUNTS ARE SUBJECT TO SUBSTANTIAL CHARGES FOR MANAGEMENT AND ADVISORY FEES. IT MAY BE NECESSARY FOR THOSE ACCOUNTS THAT ARE SUBJECT TO THESE CHARGES TO MAKE SUBSTANTIAL TRADING PROFITS TO AVOID DEPLETION OR EXHAUSTION OF THEIR ASSETS.
