90 Days after the Massive Peak in Volatility

We hope the holiday weekend to celebrate our country’s independence finds you safe and with an opportunity to enjoy the festivities regardless of the challenging backdrop of current events. It’s been over 90 days since the market volatility peaked so we wanted to update the analysis and add in new thoughts and observations. Recall that we focused on market sell-off events that had a volatility spike that is 7X greater than the total average volatility of the Dow Jones 30 for a period from 1985 to the present pandemic. And that we used a simple definition of volatility as the 10-day moving average of the standard deviation of open-high-low-close prices divided by today’s closing price.

The volatility of today’s market is still elevated compared to historical averages and is in the same range as the two historic benchmarks at around 100 days after the peak.

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The significant difference is that the market returns after the COVID19 bear market are significantly higher than the market performance after Black Monday and the Financial Crisis.

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This is true for all three post-peak timeframes we covered so far – 30, 60, and 90 days after the peak.

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We think there is one obvious answer that explains this difference: The US Federal Reserve System and Bank. The list of Fed actions taken since the start of the pandemic is beyond the scope of this email blog. We’ll simply list the dates of formal announcements of specific policy developments aimed at supporting the financial markets to illustrate the degree of interventions: March 3, March 15, March 23, April 9, April 27, June 3 and June 29. Using the table above of comparable scale market sell-offs, the positive influence of the Fed actions is valued at net market gain of around 13%. With a US stock market capitalization of $38 Trillion (Dec 31, 2019) – this is approximately a $4.8T total market gain so far. We’ve made no attempt to quantify the cost of the Fed’s actions, but are willing to estimate it is significantly less than this amount, especially considering the money multiplier effects.

Lastly, you may have heard in various news commentaries – that the “Fed is out of bullets” – amusing that they only had one lever, interest rates. This is clearly not the case when reviewing the numerous actions taken over the past three months. It’s probably more accurate to say that they have a very large and creative array of policy tactics that can move the markets.

As we committed in a prior email blog, we continue to work on developing a mechanical trading system to take advantage of the next spike in volatility peak. The YTD Forte results show that we were successful in avoiding the big sell-off, but now, how can we capture the rapid recovery typically shown in the above table in future opportunities?

Forte Strategy Update

We executed five trades last week using the Nasdaq 3X leveraged ETF (TQQQ) for a net gain of 1.3% compared to a gain of 4.0% by the S&P 500. Our YTD net results so far equal a 2.1% loss compared to a 3.1% YTD loss for the S&P 500. Our YTD max drawdown is 9.5% compared to 33.9% for the SP 500. We also continue to build performance stats on our new Forte Futures strategy which went live two months ago.

More details about our trading activity can be found by registering on the Collective2 website and searching for Forte Strategy. A running list of these email blogs and general information about Maestro Capital Research can be found at maestrocapitalresearch.com.

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