Friday, Jun 12th 2020

The risk/reward today


In late February, we activated full hedges for Titan clients based upon our signals -- both quantitative (e.g., exponential moving averages) and qualitative (e.g., economic growth and earnings risks), relating to COVID-19.

Over the subsequent three weeks, our hedges earned +25% in value while the market sold off. We didn't just protect clients' capital during this COVID-19 drawdown, we enabled them to earn profits. But fast forward just a few months, and the S&P 500 has had its strongest 50-day rally in history. 

Have we overstayed our welcome with our full hedge? Or is it just a matter of time before the next sell-off?

It's not productive to try to forecast the market - even the Fed cannot predict the economy despite having hundreds of PhD economists. However, we can gauge the "risk/reward" which we believe has deteriorated in recent weeks.

Our indicators suggest our full hedges remain appropriate. Here is a quick sampling:


  • Sentiment indicators like the put/call ratio are at extreme levels.
  • Retail investor participation is at highest level since the dot-com boom ("FOMO" could be driving the market).
  • Indexes have not yet retested critical moving average levels for support.


  • Prediction markets currently favor a Democratic election sweep, but prediction markets were wrong last election. Volatility seems inevitable.
  • New virus cases are accelerating outside of NY state amidst reopening.
  • Fiscal stimulus benefits seem likely to dissipate in coming months.

These suggest the risk of a sell-off is heightened. Note: we are not saying a sell-off will happen, but rather that the probability of one seems high. As such, in our view it doesn't make sense to be 100% long. You should have at least some of your money positioned defensively.

We believe many investors are not appropriately weighting downside risk. This wide range of potential outcomes suggests time for caution (vs. exuberance).

Hence tactically, we think it's wise to have a small portion of our clients' capital hedged.

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