Last Week in Brief: October 10

October 10, 2014

Last week saw markets imitating Fight Club. If you were brave enough to show up, you got beat up. And beat up stocks were, falling 3.1%. Their biggest one-week drubbing since May 2012.
Safe-haven stocks like Microsoft, Google and Intel took body blows all week. And Friday? That one left a mark. The first time in two years that the S&P spent an entire trading session below its uptrend channel. Translation? Things just got real. Those short, V-bottom rallies that have characterized almost every market bounce these last couple of years? We may not see one for a while.

Investors shouldn't be fazed by the recent pullback. We're only five percent off the highs. Traders? You'll want to sit on the sidelines for a bit. Avoid any big bets. Because this week will be telling. Should the beatings continue? Then we'll be adjusting our strategies to accommodate further downside.
Of course, there are any number of means to profit from the recent volatility. By investing with the trend, a similar correlation to a specific market, or an inverse correlation to the same. Many of which can be derived with some degree of probability by seasonal patterns (ever seen the upside probability during the five trading days bridging Rosh Hashanah and Yom Kippur?).
One such tactic, ideated by the firm's Brian Parker, was a play on the inverse correlation of the VIX and the S&P500. Given an extended and inordinately low level in the VIX volatility or fear index, we went long volatility options, prognosticating that seasonality and less-than-ordinary volatility would lead to a jump in the VIX. Conversely, the trade enabled us to raise cash while the market sold off - which it obviously did. And as the VIX doubled in less than two months, ascending from 11 to 24, the option values rose markedly. Click here if you'd care to learn more.
Politically, the nation has gone impotent.
Last week, a politically connected friend mentioned that Jeb Bush had placed assets into a blind trust. That this election, more than others, will come down to Florida and Ohio. Jeb, apparently, can do well in both.
Another Clinton v. Bush contest? The last twenty years have seen the advent of the electric car. The iPhone. Solar-powered homes. Fracking. Wonderful innovations throughout the field of biotechnology. Yet, like bed bugs, the Clintons and Bush's will not leave. Have we no newer, more timely candidates? Pelosi. Reid. McConnell. Bush. Clinton. American politics have become evolution-proof.
This midterm, like all recent elections, has become a farce.
Democrats contend that the GOP is conducting a "war on women." The GOP wants to blame Obama for Ebola. Senate Majority Leader Harry Reid is all-but obsessed with the Koch brothers. Where's the foreign policy? Economic literacy? Philosophical ideas? They've gone the way of the bookstore. In favor of something that can be tweeted in 140 characters or less. Then made into a movie. So it can eventually generate video game royalties.
Along those same lines, President Obama gave a speech last week in which he touted his business bona fides. An attempt to calm the nation's commercial interests, I guess. He swore that he's not anti-business. "I actually believe that capitalism is the greatest force for prosperity and opportunity the world has ever known," he stated. Of course, when the president has to clarify such sentiment six years into his administration, one could argue a lack of clarity hereto now.
In Asia, fights broke out between pro-democracy protesters and anti-protest groups. Protest barriers were torn down. Punches were thrown. Then, police moved and separated the opposing factions. Some of the anti-protest groups spoke Mandarin, but could not speak Cantonese. Signaling that they may not have been from Hong Kong.
To the northeast, Russian units appear to be pulling back from the Ukrainian border. Further, Ukraine reports that there has been a reduction in Russian troops within its borders. So, that hotspot appears to be cooling. Though the U.S. and European sanctions against Russia appear to one of the catalysts for the recent European economic slowdown. Careful what you wish for...
Saudi Arabia has told oil market clients that it's comfortable with $80 per barrel oil. Sending crude to a 23-month low. All of which has stirred tensions in OPEC. With some calling this the beginning of the end for the cartel.
The theory holds that the Saudis want to knock down the price of oil in order to make less attractive the act of drilling for oil in the shale regions of Texas, North Dakota, Pennsylvania and Poland. A brutal tactic. But it could be effective.
Meanwhile, U.S. airstrikes have been largely ineffective against ISIS in Syria and Iraq. Leaving ISIS forces to advance into the suburbs of Baghdad where they claim to have 10,000 fighters. While an assault on Baghdad remains unlikely, ISIS is now in a position to direct weapons fire across the city. Certain military advisors are calling for the placement of boots on the ground. Seemingly right after U.S. troops were pulled out. All of which is contributing to recent market turmoil.
Weekly Results
Major markets finished lower last week. The DJIA fell 2.74%, the S&P 500 dropped 3.14%, and the Nasdaq declined 4.45%. Small cap stocks declined 4.65%. And the 10-year Treasury bond yield fell 15 basis points to 2.28%. Gold rose $31.74 per ounce, or 2.66%.taking their biggest one-week beating since May 2012, .

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