Stock Talk - Stock Market Hedging Before the Election- Are You Overpaying?

Starting point is 00:00:00 Throughout 2024, many strategists have called for heightened volatility in the stock market due to the upcoming presidential election in November. Even though Carvice team here expected short-term bouts of volatility in early first quarter and then again mid-summer. The calls for market volatility and uncertainty around their November election kept many investors focused too much on political outcomes. Many investors kept themselves from pulling the trigger, from buying stocks on weakness, or worse yet, totally on the sidelines, or going to cash throughout the, lately there's been talk about hedging your portfolio for an adverse election outcome in a few weeks. I'm not exactly sure what that means, particularly when looks at the cost of insurance first, actual market volatility. So what am I talking about? I'm talking about a bit of a technical data series I look at behind the scenes that's been quite good at defining the future moves,

Starting point is 00:00:50 or at least which way many hedgers are leaning towards and if it's a worthwhile exercise to spend the money to hedge. We've discussed these three data series many times over the last few years. In order of relevance to an investor, in my opinion, they are the following. First, number one, volatility is measured by the CBOE VIX index, which most in the media refer to when discussing market volatility. As a reminder, the CBOE volatility index, the VIX is a calculation and it's untradable. It's meant to represent the market's expectations of near-term price changes in the S&P 500 cash index within a 30-day forward projection of volatility. The second measure of volatility, the is realized volatility or R-VOL.

Starting point is 00:01:33 This is the measurement of the actual volatility in the S&P 500 index over the last 30 days. This is also called historical volatility. This is the volatility you see on your screen when you watch stocks on C&BC or Bloomberg or when you sit in front of your screen and watch your stocks all day. Finally, my favorite measure of volatility

Starting point is 00:01:52 is Vol index futures. This is the markets for traders to trade their beliefs about what volatility will be in future months. To me, this is a particularly good measure of the true cost of insurance in future months. It isn't some math equation based on a basket of index puts and calls. It's traders forward expectations of the future, and you are charged accordingly to wager or hedge or protect your portfolio against volatile market moves. Many market strategists have thrown up an alarm warning most of the year, warning of stock market risk around the election. The work our team has done

Starting point is 00:02:26 throughout the year has said much of the risk in the markets that others have been warning of that have kept many investors from investing and enjoying some, if not all, of 2004's 20% plus year-to-date index gains had mostly been priced in already. And in 2024, would likely turn out to be a very normal year and a good year for the markets. I've noted the same thing since the year started. What's that? It's that almost everyone is already nervous and hedged with the same time frame and site. They've been that way all year. The insurers and the market makers and the volatility markets have been charging investors near the exact same premium all year for the same time period most are worried about. Investors, we've shared this chart and table before, but here it is

Starting point is 00:03:11 again. Take a look at the chart of the relative moves and realize volatility, that's our vol, which is actually happening in the markets. A spot VIX index or what the math majors you don't trace say volatility might be over the next 30 days. And the forward volatility future. continuous contract for the week right in front of the presidential election. The October vol expiration, which was the 16th, that was two days ago. I've also added the VAL futures for November expiration, which is after the election. The first chart here plots the absolute level of each. Our vol, that's actual volatility, is in white, spot vix index calculation is in yellow plot like a warning flag, but remember it's

Starting point is 00:03:51 not predictive. The October of all futures contract for pre-election is in red, as if it's It's been warning most strategists all year. And post-election volatility contract for November in green, kind of representing the supposed exhaling of concerns post-election in the all-clear. Now, investors, take a look at the exact same data plotted as a percentage change from January 1st throughout the year. As one can see, the actual volatility in stock prices as of this filming on Monday was down by minus 14.5% year-to-date. Yes, investors, your emotions and eyes deceive you. Stock price movements are now lower than at the beginning of the year when the election was less of a worry for most of us.

Starting point is 00:04:30 This spot-vall index is minus 32.7% since then, and the volatility for pre-election ending this week is essentially flat at up about 1.2%. In other words, the cost to ensure your portfolio for the election period at the beginning of the year and now is nearly identical. While the cost of hedging for post-election turmoil that most people talk of, the economic, political and market forecasting doomers those waiting on the event to get invested, that's down over minus 6% since early January. And the S&P 500 has gained how much year to date? Well, as of filming over 22% in price and 23% in total return, including reinvested dividends. Take a look at the year-to-date plot.

Starting point is 00:05:14 As you can see, realized volatility at the beginning of this week was under 10. Yes, folks, with the stock markets at all-time highs, up over 20% and the election approaching in two weeks, actual market volatility is nearing its low for the year at under 10. Wars in the Middle East, presidential candidates dropping out and being replaced, the other candidate being shot at, the Japanese yen carry trade implosion and AI investment cycle hyper knot, and new all-time highs in stocks and virtually new lows and realized that's actual volatility. On the other hand, the continuous contract for October expiration UxV4 has been nearer. the identical price throughout the year. As of this writing, it's priced around 20, and throughout

Starting point is 00:05:58 the year, anytime it's risen to between 20 and 22, sellers of volatility have come in, and buyers of the SP 500 have shown up. It happened in early first quarter of 2024 during the pullback, again during the April decline, and in a big way, during the Yen-carry trade panic in August. Will it happen again in buyers buy the dip on any political panic or third-quarter earnings weakness in the overall market, our indicators continue to say, yes, it shouldn't be different this time. And regardless of what you've heard on TV since late 2022, and again, in late 2023, it's still a bull market until it proves it isn't. And investors, in my opinion, 2004 has been one of the most hated bull market year runs I've seen in 35 years in business.

Starting point is 00:06:45 Why do I say that? Because it's been costing you two times actual market volatility to ensure your portfolio. It has cost you between 20 and 22 vol all year to insure yourself for the election. The market makers have known all year that investors would be fearful and made you pay up for insurance. Even back when Spot Vix was near 20 in April, it cost you around 21 volatility to insure for the election. I found over the last 20 years of investing that while never perfect, nothing in investing is, it's very, very, very rare for the market makers who traffic in forward volatility markets, the volatility insurance salesmen, I call them, to misprice future market risks outside of Black Swan events like the COVID pandemic or other unpredictable events.

Starting point is 00:07:31 In fact, if anything, my work says most of these hedges will expire worthless and cause markets participants to cover higher, or at least pressure stock prices higher for longer in the fourth quarter of 2024 throughout early 2025. This is actually the reason I've mentioned that The math behind the market says that not only was 5800 year-end S&P 500 likely to be too low, but the 6,000 end of January 2025, which we first discussed in October of 2023, was also likely to be too low by upwards of 200 plus S&P 500 points. Investors, it's a bull market until it proves itself. It isn't. If you're uncomfortable with a wider range of possible equity outcomes,

Starting point is 00:08:15 the Oak Harvest team has launched a new strategy that retains the ability to go long stock, short stocks, as well as buy partial hedges and shock absorbers for a stock portfolio. You can go to our website, oak harvest funds.com, to find information on this new strategy. From the whole team here, from Eric behind the camera, myself, from Chad and Stu over here on the right that you might hear in the background, have a great weekend. All content contained with an Oak Harvest podcast expresses the views of the speaker and is for informational purposes only. It is based on information believed to be reliable when created, but any cited data, indicators, statistics, or other sources are not guaranteed.

Starting point is 00:08:54 The views and opinions expressed herein may change without notice. Strategies and ideas discussed may not be right for you, and nothing in this podcast should be considered as personalized investment, tax or legal advice, or an offer or solicitation to buy or sell securities. Indexes such as the S&P 500 are not available for direct investment, and your investment results may differ when compared to an index. Specific portfolio actions or strategies discussed will not apply to all client portfolios. Investing involves the risk of loss and past performance is not indicative of future results.

Stock Talk - Stock Market Hedging Before the Election- Are You Overpaying?

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