The Blame Game

Plenty of ink has been spilled about the selloff in global equity markets including SPX and RUT. We have been witness to an escalating VIX and RVX, albeit with significantly lower highs (to this point) when compared to the late August selloff.

Psychologically, we like to be able to attribute market pullbacks to something specific. People want a narrative. They prefer to have something to point to and affix blame.

Jesse Livermore famously spouted, “There is only one side of the market and it is not the bull side or the bear side, but the right side”.

The market is always right and global markets are re-pricing risk.

Those that only watch U.S. Equities over the past few years have grown accustomed to relatively shallow pullbacks in benchmark indices followed by a march higher. Colloquially referred to a “buy the dip” mentality.

  • SPX is 10% off all-time highs – “correction” territory.
  • RUT is 20% off all-time highs – “bear market” territory.

Commodities, particularly those tethered to “growth” like Crude and Copper, have pointed to a global slowdown for at least a year.

The TED spread, or the difference between what the U.S government pays to borrow short term and what banks pay to borrow from one another is indicating growing systemic concern (counter party risk?).

TED spread

Source: St. Louis Fed

If you prefer – point the finger at China, or the Fed, or Middle East tensions, or North Korea, perhaps Greece or “the algos”…… Or maybe, don’t point the finger at all. Try to figure out where the greatest risk/reward relationships lie given the constantly shifting macro landscape. Consider using options to tactically express your market sentiment. Evaluate what VIX or RVX is telling you because you need not be a bull or a bear and not everything must have a narrative.