The start of a calendar year is a time for capital shifting. Large funds lock in their profit for the previous year to juice their bonuses as well as paint a good picture on the year’s performance for their investors. This January however is one of the most volatile months in recent memory as a number of demographic, geopolitical, and centralized planning themes create market chaos.
Indeed, the CBOE Volatility Index hasn’t been this high since June of last year, and at this point it is more profitable selling options contracts than to invest their underlying securities.
Emerging Markets currency problems appear to be the theme of the month, and a good part of the turbulence can be attributed to investors weighing in on the impact to Western markets.
For us, our algorithms work on statistical probabilities based on historical events, and when the correlations and historical patterns break down, the number one rule in pattern trading is to wait on the side lines. As a result, we have been mostly in cash as markets continue to reconcile because, as that super computer in War Games once said, sometimes the only winning move is not to play.
The large fund reporting deadline is still 1 week away but we continue to monitor the feed as early reporters submit their 13F forms. It is at that time when we will have the best investment picture for 2014. Until then, the complete picture of what large funds are positioning for is somewhat incomplete. Holdings for the third quarter of 2013 show large positions in Financials and Emerging Markets, but those sectors are down considerably in 2014. For the 4th quarter, large funds are either going to double down on their positions, or like John Boehner, as if investors are going to call it a decade and go completely into defensive stocks and other assets such as corporate bonds.
Until we get the big picture next week there are some smaller scale fundamental themes we are tracking which we can capitalize on now with Exchange Traded Funds: