Hyperion: June 2023 Update
The notion of a market dominated by a small group of stocks has given rise to the term “barbell” economy, characterized by a handful of prominent winners and numerous underperforming entities. Apple, for instance, recently reached a remarkable market capitalization of $3 trillion. Morningstar reports that the top ten largest stocks have accounted for an astounding 97% of the total market return this year, a significant departure from the historical average of 5%. In stark contrast, S&P Global Market Intelligence reveals that a staggering 286 companies filed for bankruptcy protection by May, marking the highest number for the first five months of a year since 2010. Despite these extreme conditions, the S&P 500 index managed to ascend by +6.6% in June.
The Directional Spread Strategy and Market Volatility:
While the Directional Spread Strategy typically thrives in a volatile market environment, the lowest volatility index (VIX) readings since February 2020 did not offer substantial support in June. Although the S&P rallied strongly with only a minor pullback in the middle of the month, the ratio spreads we held did not yield significant profits.
The Tactical Program and Low Volatility Opportunities:
The decline in the VIX to levels unseen since early 2020 presents intriguing trading opportunities for the Tactical Program. The demand for very deep out-of-the-money protective put options and the diminishing interest in higher-priced put options close to the market during periods of low volatility have improved the dynamics between these options. By capitalizing on this situation, we have consistently identified profitable spread positions by purchasing relatively inexpensive put options and selling a ratio of options positioned below them. As volatility decreased, these spreads expanded, allowing us to increase our position sizes in June and going forward.
Uncertain Resolution of Market Divergences:
The resolution of the stark disparities in the market remains uncertain. The Federal Reserve maintains its stance that inflation is persistently high, making it unlikely to reduce interest rates in the foreseeable future. This cautionary approach has reverberated in the fixed income markets, pushing bond yields to their highest levels since the period preceding the Financial Crisis. We believe that equity markets are currently underestimating the Fed’s commitment to curbing inflation, suggesting that higher interest rates may endure for longer than anticipated. Achieving the previous inflation target of 2% would necessitate either a stringent interest rate environment or a recession, neither of which would be advantageous for equity prices.
Disclaimer – 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.