MarketsFlow’s Metric Approach: a welcome alternative to tackling volatile markets

It has been an exciting week so far, with strongly positive returns, building on a mostly uptrend week. Living these recent days many a market participant might be wondering whether the volatile, turbulent, loss-making episodes of just a few weeks ago really happened at all. It creates an array of questions about how investors are now positioned in the market and how they cope with the volatility. Did several weeks of turbulent times drive a lot of investors out of equities, and will they be slow to re-engage?

After the onslaught of many negative days, it might feel natural to cut exposure on the basis that any further damage arising from markets moving even lower would be impossible to tolerate. Perhaps several weeks of downward markets were being extrapolated in investors’ expectations anticipating several months of back-to-back declines.

Where might the down-market end? Could we be looking at dozens of percentage points drawdowns?

These questions might be interesting to speculate on, however we can go some of the way towards answering them with facts. Even during a significant downward market, a number of counter-trend rallies can occur, and they can be aggressive.

DJI Volatility examples

It seems to us that any regret an investor may feel at selling equities when markets have already fallen could then be aggravated by the further regret of witnessing these counter-trend rallies without taking a sufficient and rewarding part in them.

In our case, being quick to respond to changes in markets through the daily signals generated on our platform, we were and are not overly concerned about whether October’s disruptions would prove to be the start of significant down-leg in equities over the coming quarters. Nor whether a period of upside such as witnessed during the last week and a half marks the resumption of a bull market or is simply a brief interlude of optimism.

Because our allocation to equities, our selection within equities, and the way in which we take these exposures (stock vs options) can change rapidly, long-horizon questions are not of great interest. In addition, the signals that underlie our portfolios are derived objectively and scientifically on the basis of processing huge data sets, therefore the positions taken are based on is mathematically probable suggestions, rather than allowing emotions to creep into our portfolio decisions.

As this week unfolded, our signals said clearly that we should add market exposure aggressively and likely upside ‘breakouts’ were indicated across a number of the stocks that we cover. By yesterday, we had taken our total market exposure up to the highest it has been in several months!

Those for whom October’s trauma looms large in their recent memory might have felt uncomfortable executing such a risk-increasing move and may have looked around for positive news releases or improving economic or corporate data before feeling justified in doing so.

We do not rely on news to make the most of our day to day activities; we depend on metrics, even if these might contradict our very real human biases.

 

Leave a Reply

Your email address will not be published. Required fields are marked *