Originally published by AxiTrader
The absence of volatility is not the absence of risk.
That's something I have written more than once before. And it is something that I hold to be true as the US stock market marches relentlessly higher.
But while the absence of volatility may not be the absence of risk it is also true that the existence of risk is not a guarantee of its materialisation.
It all comes down to probabilities, timing, and the realisation of risk.
And that's one of the reasons the US stock market just keeps rallying. Yes, there are risks to the outlook. Yes, PE's are a little elevated. Yes, the data which supported the Trump rally has faded badly. And yes, the president's tax and infrastructure agenda looks delayed indefinitely.
Yet the the S&P 500 closed at a new record high last night of 2415.07 - a 262% increase on the March 2009 low of 666.79.
It is with this in mind that I saw an article this morning citing hedge fund legend, and Elliot Management founder, Paul Singer who just raised $5 billion to deploy when "all hell breaks loose".
In a recent letter to investors, Elliot Management said "We think that it is a good time to build a significant amount of dry powder".
Note the firm is not saying short stocks, or go out and sell, sell, sell. Simply that it thinks there is a big dip coming at some point and it wants to be ready with cash at hand.
And that's kind of where things are right now when it comes to US stocks.
There are plenty of risks out there but they are yet to materialise. So the buyers keep buying and the sellers get sick of not making any money and withdraw to the sidelines.
And for me Elliot sums up perfectly my feeling about stocks and markets right now - this low volatility, relentlessly grinding bull market will persist. Until it doesn't.
But when that will happens is one of Donald Rumsfeld's "known unknowns".
Elliot sums up this up perfectly - things will be fine, until they are not. here's the quote (my emphasis).
“Given groupthink and the determination of policymakers to do ‘whatever it takes’ to prevent the next market ‘crash,’ we think that the low-volatility levitation magic act of stocks and bonds will exist until the disenchanting moment when it does not. And then all hell will break loose (don’t ask us what hell looks like…), a lamentable scenario that will nevertheless present opportunities that are likely to be both extraordinary and ephemeral. The only way to take advantage of those opportunities is to have ready access to capital."
Or in other words, investors are going to make hay while the sun shines but they better have planned ahead when the weather breaks.
Have a great day's trading.