One word to sum up this past week? "Uneventful" for index vol traders but "mixed" for those actively involved in TSLA or the semiconductor industry.
IWM has been lagging behind the SPY as a sign that investors are still worried about interest rate levels.
Could this growing disparity be the first hint of market anxiety? It's a possibility, especially considering how calm the VIX and VVIX have been in 2024. It's tempting to try timing long positions in volatility but remember: the VIX can remain low for extended periods. Recall December 2016 and November 2017, when it never rose above 16 despite… Trump’s first year in office?
Could we be in a similar market regime? It’s hard to say for sure, but the week ahead should bring a lot more clarity to investors' risk perception for 2024.
Meanwhile, let's resist the siren's calls and stay calm during what promises to be a bustling trading week. If necessary, consider taking a leaf out of Odysseus' book: tie your hands behind your back to avoid overtrading while the market dust settles.
In other news
Since the highly anticipated listing of the Bitcoin ETF, the cryptocurrency market has experienced a 20% downturn. Although it recovered some losses last week, closing above $42,000, the expected surge in demand from institutional investors, which was touted to send prices soaring, has yet to materialize.
But it's not been all bad news for everyone. The listing has opened up a straightforward and effective strategy in the newly listed market: the classic cash and carry trade. This involves shorting futures and buying the spot, pocketing the difference. How do you buy the spot, you ask? Well, with the ETF! Replicate at your own risk.
This strategy harks back to the 90s when traders exploited interest rate differences between similar currencies (like borrowing JPY at 0.5% and placing it in GBP at 4%) and is still an important activity for bonds and currencies institutional desks. It used to be a lucrative approach in the crypto exchange world, albeit with risks that are now well-known. The fact that this strategy can now be executed under the supervision of a reputable exchange like the CME bodes well for the business of arbitrageurs, a little less for the speculators.
Thank you for staying with us to the end, and as always, we have a few interesting reads from last week to share:
- For insights into monetary policy and macro analysis, we consistently turn to Claudia Sahm's excellent publication, Stay-At-Home Macro (SAHM). Her recent article advocating for a swift rate cut by the Fed significantly influenced this week's Note.
- Emile Phaneuf's guest post in dives into the future of Bitcoin following the listing of ETFs. It's a must-read for anyone interested in the cryptocurrency space.
- Lastly, here at Sharpe Two, we've been discussing ways to bridge the gap between professional and retail traders. The positive feedback has been overwhelming, and we're grateful for your engagement.
That’s it! Have a wonderful week ahead, and happy trading.
Ksander
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