On the final day of January, the Federal Reserve dampened hopes for a rate cut in March, leading to a downturn in stocks after a strong rally earlier in the month. Although inflation has decreased from the peak levels of 2022, it remains significantly above the Fed’s target of 2%, and lowering rates now could hinder efforts to reach this goal. Additionally, mirroring events from a year ago, New York Community Bank’s stock suffered a steep decline due to liquidity concerns, raising fears of another regional bank crisis.
Outside of the end-of-month selloff, the S&P index experienced minimal declines. The limited pullbacks were insufficient to materially impact our long put spreads in the Directional Spread Strategy, resulting in modest gains. Lower volatility has led to appealing trade opportunities, with spread trades presenting some of the more attractive setups we have encountered. The market’s ongoing concerns over a multitude of issues may be the source of such pricing.
The Tactical Strategy managed to identify profitable trading opportunities despite low volatility, achieving a net gain in line with our targets. Even with a low VIX, option credit spreads provided profitable opportunities, which we capitalized on. The multiple crosscurrents confronting market participants are keeping values firm in the deep-out-of-the-money options we often prefer to trade, but we anticipate that one or more of these ongoing issues could be the proximate cause for a volatility expansion.
During U.S. Presidential election years since 1928, the S&P 500 has been positive 83% of the time (20 out of 24 times). However, two of the more dramatic losing years have been this century (2000 and 2008). While there’s a general upward bias during election years, rapidly deteriorating economic conditions could overturn this trend. With the many crosscurrents that we have noted in recent months, some degree of portfolio hedging would be prudent, especially with the VIX being so low, making those hedges rather inexpensive. At Hyperion, a core component of our portfolio is to use option spreads that can profit during downturns, and we leverage our decades of option trading experience to gauge how aggressive or conservative positions should be based on the ongoing market factors we continuously monitor.
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.
