Weekly Paid Newsletter 12/12/2021

Markets are more fragile than ever. Asymmetric Portfolio +34.73% YTD.

The new Covid variant, Omicron, and Jay Powell's statements warning about the critical inflation situation pushed our portfolio to a high of +44% YTD. This return precedes a sharp market fall (irony).

These highs were an ideal situation to sell some positions in our portfolio with returns above +150% in just a few months and to be able to increase our cash position.

However, this week there has been another rally in the major indices (S&P500 and Nasdaq), causing volatility, which had reached 37 last week, to fall back to levels around 20 (-45%). This collapse in implied volatility is a double-edged sword. It creates the perception of low risk in the markets, while many quantitative strategies increase their position in this type of asset to ride the wave when the peak of the market.

One of the most curious data that indicates the fragility of the markets is the following chart:

This year the indexes have had impressive returns, but this return has come from 5 companies: Apple, Microsoft, Google, Tesla, and Nvidia. These five companies are worth a combined $10T, a quarter of the U.S. economy. Having highly concentrated indexes means that the moment these companies weaken, we will see a significant index decline.

These rises in just one week of the indices (SPY +4%) have made us find some gift options, as we told you in the section of our weekly orders. We are constantly maintaining a portfolio with a shallow risk (+40% of our portfolio in low-risk assets).

Volatility is expected to remain very high; this means that small movements in the SPX could induce large volatility movements, as happened in late 2018 or early 2020.

Our discourse may sound tremendous, but it gives us some good returns in any market situation with a shallow risk. Just ask all those investors who jumped on the growth wave and have seen their savings shrink by 30-40%.