Article #541) IEF worked great, shorting Volatility, and damn the Fed!

Updated: Dec 30, 2020

VTS Community,

The Tactical Balanced Strategy has been riding that IEF Bonds train for a little while now with good success.  Entered the position exactly to the day on the lows, and with the recent interest rate "pause" the position is still hanging in there.  There are signs though that I might exit soon but so far, great position.  Tactical rotation allowed me to avoid the entire -20% crash in the S&P 500 and actually still made a nice little profit along the way.  Win/win. The Tactical Balanced Strategy was up 13.29% in 2018, clobbering all benchmarks in a rough year.

Under normal conditions in the past it would have exited a couple weeks ago and moved back into stocks, but what we're seeing recently within the volatility space is very bizarre.  Volatility metrics just aren't buying this rally so far.  But with yesterdays interest rate developments  (more on that in a minute)  we've seen the first sign of normalization for at least the past 4 months.  We'll see if the momentum continues.  I suspect it won't if I'm being honest, but I don't trade based on my gut feelings, I only rely on the math.

Back to shorting volatility: 

Both the Aggressive Vol and Conservative Vol strategies are signalling a new trade so they will be taken.  Remember I am data dependent and rules based, so I wait for the signals and then I follow them.  

Now I have a pretty good vibe on the pulse of the community.  I know many of you will be uneasy about this.  Yes, there's lot of negative news out there, lots of headwinds.  What I will say though is this.  Remember, I am a nimble trader with a 1 day time horizon. If I enter a trade today, it's just for 1 day and I re-visit the next day.  If conditions change the trade can easily be reversed.  My rant yesterday about Apple and how fund managers are buying it on bad news and committing their investors to holding for extended periods of time because they are not nimble is exactly the opposite of me.  This has served me very well and is one of the reasons I am able to successfully reduce drawdowns.  I take trades when conditions are right, and I exit immediately when things change.

Begin rant/

I'm about to do my second rant of the week which might get me dangerously close to being labelled a grump, but I feel compelled to.  What happened yesterday has to be chastised.

It was a Fed day, meaning they decide on policy and do a little press release.  Now nobody was expecting any actual interest rate policy decisions, those typically only come at the quarterly meetings, so we were only focused on the language of the dialogue after.  And we were treated to an excessively dovish tone.  Dovish for those that aren't up with their Fed speak, means likely holding off on future rate hikes.  They already took it down from a 3-4 rate hike expectation, to a 2 rate hike expectation recently.  And now they are basically signalling it's going down to 0 or maybe 1. 

I try my best to remain positive and upbeat about the future, I try to be an optimist.  But what I consider to be massive mistakes on both government fiscal policy and Federal Reserve monetary policy has me feeling dejected.  I held out hope that there would be some grown ups who care about the future damage that these policies are going to do in the next recession.  It seems clear now they simply don't care.  I can only conclude that the next recession, whenever that is, will unfortunately be a severe one.  "They" can try to prolong the inevitable, but when it comes there won't be any weapons to combat it.

One of the best, and perhaps the only weapon the federal government has to combat recessions is increased spending.  Remember the huge money injections in the last financial crisis, rescuing the banks and mortgage industry, saving the auto industry, all that spending isn't going to be possible if the current trajectory isn't significantly curtailed now.  But deficits are running very hot, and President Trump hasn't even addressed healthcare or infrastructure yet, and there's even talk of another tax cut.  All that spending, all the while GDP is not very impressive.  Don't believe the hype.  The economy is average at best, and weakening.

Likewise, one of the best and perhaps the only weapon the Federal Reserve has is to cut interest rates.  But if they never went up much to begin with, what's to cut?  The last time around after the crisis in 2008, the Fed Funds rate was cut from 5.25% to 0% with massive quantitative easing and it barely saved the day.  Right now at 2.25-2.50% and 4 trillion already on the balance sheet, it's hardly going to be effective at all.  

Like I said, I try to be an optimist, but I'm having a hard time seeing how this ends anything but terribly.  I don't just want to complain with no solutions offered though, so I'll try to put a video together in the coming weeks with some ways people can start protecting themselves now in preperation from what is coming.

/end rant

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