Aside from a brief 2-day pullback, US equity markets have been on fire since the surprise decision by Britain to exit the European Union.
There were few opinions (aside from my own smiley face) prior to the “Brexit” vote that suggested such a scenario was possible. Granted, my own vision was for a rebound in equities over the next couple weeks or months, not the fierce snap-back that we’ve seen unfold in a handful of trading days.
While equities around the world appear to be rallying, US equities have been particularly strong – the S&P 500 busted above 2,137 this week, which bests the previous all-time high achieved in May of 2015.
The pace and current price of the world’s most-watched equity index is certainly worth noting.
While momentum tends to breed additional momentum, it’s hard to get super bullish on equity prices reaching for all-time highs. Traditionally, asset prices go up and down - even if the epic bull run we’ve been on since the Financial Crisis is pushing the “down” part of that equation further and further toward the mythological.
Do all-time highs mean you need to immediately change your approach or strategy? Certainly that depends on your view and risk profile.
On all-time lows, one would think that the risk of the market going higher would outweigh the risk of the market going lower – a drama we’ve seen unfold since the lows of 2007-2009. On the flip side, having notched new all-time highs in 2016, it seems that risk (or perhaps opportunity) on the downside is getting more enhanced.
Does that mean we should all bet the farm on a super-bearish portfolio? Hardly.
What it might mean is that all traders should review their portfolio slide risk on both the up and downside to ensure current positioning matches outlook.
If you are net short volatility/premium, one adjustment might be to lean more deltas short against the possibility of a pullback. This approach was discussed by Dr. Jim Schultz on an episode of From Theory to Practice and highlighted recently on the blog.
Portfolio management is a key driver of success in trading and recognizing when and how to make these adjustment is an art (see Best Practices: The Art of Adjusting).
While current market conditions may not dictate a specific change at this time, it’s worth making that decision consciously, rather than having the decision made for you before the market mood potentially shifts.
If you have any questions about trading all-time highs or leaning short deltas in your portfolio, we hope you’ll follow up at firstname.lastname@example.org.
We look forward to hearing from you!
Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.