Daily Market Update – August 20, 2014 (Close)
After two strong days that found the market reveling in the absence of any significant geo-political news, it appeared that this morning is going to get off to a flat start, but that didn’t last too long.
A flat start wouldn’t have been unusual on the morning of a scheduled FOMC statement release, especially one that’s expected to continue a year long string of fairly benign and inconsequential restatements of policy.
Where there may be some excitement is in Jackson Hole, where on Friday Federal Reserve Chairman Janet Yellen will be making some remarks at the annual retreat of the Kansas City Federal Reserve.
While she probably won’t say anything intended to excite anyone or catch anyone off guard, it’s usually a case of interpretation or sometimes an off the cuff remark or less than perfectly crafted answer to a question.
Sometimes, however, insights into a thought process can take people off guard or start speculation running wild as to the true beliefs that may underlie the public demonstration of idea s and beliefs.
While Janet Yellen is considered to be “dovish,” the new Vice-Chairman, the influential and highly regarded Stanley Fischer is considered to be a “hawk.” However, after some surprising dovish comments by Fischer in a recent speech in Sweden it should probably come as no surprise that regardless of how any of these economists may be pigeon-holed they will still act based upon data, despite some potential for philosophical bias. However, our expectations have little flexibility for anything that deviates from those expectations.
Coming on Friday, those remarks may have some impact on a day that we can also reasonably expect something to happen on the Russia – Ukraine front. Either of those could move the markets which by now had started the morning within about 1% of their highs and finished the day brushing up right against those highs.
That’s an amazing turnaround from barely a week ago when suddenly everyone had discovered the concept of volatility and were all agog about the 30% and higher increase in volatility in the course of just a few days.
Looking at volatility now, which generally moves inversely with the market, you wonder where all of the noise has gone and why no one is pointing to the 30+% reduction in volatility in the past few days.
Over the next few days as we digest the FOMC and await the Jackson Hole meeting there isn’t much in the way of expectation for any significant activity. The first few days of this week have already seen the S&P 500 advance 1.3% on top of last week’s 1.2%. Add another 0.3% today and now we’re on track for the best week in 4 months. Up until last Friday’s sell-off that week was headed toward being the best in the previous 6 weeks, but ended up just missing that distinction.
But we’ll see.
Thus far, despite the strong advance higher the existing portfolio positions are still keeping pace, which gets to be very challenging once that advance gets to or exceeds the 1% level. That was certainly the case last week when existing positions badly trailed the index .
Any opportunity to generate additional portfolio income would help to keep pace with the market, but the low volatility is making it hard to justify the sale of calls on some positions, as the premiums are just so low that the offer such little income or protection in exchange for ceding some advance in share value.
As long as the market is moving higher and taking most positions along with it there’s little reason to accept a pittance and receive little in return, but as we’ve seen time and time again, all of the environment that you see around you can change in an instant.
All it takes is a mis-placed word here or there in a prepared text or a casual comment. Or maybe just another rumor of conflict or peace coming out of some corner of the world that most of us have never considered, but has suddenly set the world back into the glory days of the cold war that we thought we had won.
In the meantime there’s no reason to not enjoy the move higher, although you might enjoy things even more if our collective expectations come under attack.