After months of low volatility and the steady grind, it was nice to finally get a chance to trade on some momentum.
That all came to a head last week with the news that the United States government was looking at criminal proceeding against Goldman Sachs and Greece finally capitulated in the debt markets. What had seemed like a small blip in the strongest bull rally in decades finally reared its head when Greece admitted it was technically insolvent. This was the first sovereign default on the cards in years and the first in the eurozone.
It was actually quite fun to watch the cat and mouse game between the speculators and the officials and you could have timed the final push on the Greek bonds yields to the moment when the finance minister warned that betting against Greece would cause you to “lose your shirts”. We know who won that one. That day their credit status was reduced to junk.
If we are honest though, should Greece have even been part of the European Union? They have been fudging their deficit figures for years, with the help of you know who, (Goldman Sachs were on the other side six months ago). Their debt has now achieved junk-bond status by the ratings agencies and they couldn’t raise funds in the market even if they tried. I guess the nightmare is trying to keep this from spreading to Portugal, Italy and the other eurozone members. The problem is that this scene didn’t feature when the eurozone was proposed over a decade ago.
This shouldn’t have happened and I can’t see too much of a happy ending for the smaller eurozone members.
So, how do we make money out of this and protect ourselves from any more fall-out? Well, the volatility that we were picking up two weeks ago at 16% is looking good, having popped 40% to 22% as of Friday’s close on the VIX. At 16%, it was always too cheap.
A few of the shorts that we are running are also starting to push nicely in the money and with the old adage “sell in May and go away”, it’s time to sit back a bit and wait for consolidation and the pull-back to gain momentum. As I write, the S&P 500 has battled to close above 1 200 again and the risk aversion we were waiting for is starting to accelerate.
- Nick Kunze is the head of dealing at BJM Private Client Services
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