We have taken profit on the long volatility play we suggested February 24th:
The best way to hedge your downside here is to BUY VOLATILITY, which is still cheap. We suggest 8000, 8300, 8500 puts in March (Please ask GST-sales to help you price)
We suggest following portfolio for coming period:
- 20% Long volatility: mainly SPX, NASDAQ and DAX volatility
- 20% Long gold, silver: main XAUUSD, XAGUSD
- 40% Long fixed income: 25% TLT(ETF) + 15% VTIP:xnas USD
- 20% Long SaxoCLIMATE basket
Conclusion and strategy for this week:
There is no doubt that the market is forcing Fed and G3 central banks to move. A full 50 bps cut is now fully priced by Fed, personally I’m looking forward to see ECB’s handling of this as lower rates clearly doesn’t make any sense (or change) to economic outlook!
The critical thing here to watch after the market reaction to the policy easing is the further development in coronavirus in Europe and the US.
Remember the virus is what has created the ‘angst’ in the markets but the real economic price is yet to be priced as companies, in particular SME’s, will be under pressure due to the lack of credit and broken supply chains. Most observers in China and globally calculate that the critical period starts some three months from the outbreak if conditions have failed to normalize.
We are now two months into this crisis with Europe and the US only feeling phase 1, so clearly it’s going to be a race against time but also for central bankers and politicians to change the narrative which increasingly is becoming one of a ‘global recession’ - and this while the global credibility and communication of those same people as the lowest I have seen a too long career in the market.
Personally, I will maintain defensive exposure (small long through options on SPX).
I fully expect to only be constructive on the outlook for a market bounce for a mere week or so as this looks like a possible “third wave of five” in a bearish move in Elliot Wave terminology. And with economic data and corporate earnings warnings signaling that this needs to get a little worse before it gets better.
Don’t forget Super Tuesday tomorrow. Mayor Pete is out, and by Wednesday we will know how strong Bernie Sanders stands.
Safe travel this week,