Back in 2018, US market equity market volatility caused our derivative market stress indicator to signal bearish positioning for 61% of the year. For a quick reminder of what was behind 2018’s volatility, take a look at this post. This means that our dynamic derivatives clients’ assets spent most of 2018 in cash or 10-year US treasuries, waiting patiently and safely for better opportunities to emerge.
The first 5 months of 2019 has shaped up to be a time of better opportunities. As the recession scare of Q4 2018 wore off, subdued volatility in equity and derivative markets has driven our derivative market stress indicator to signal bullish positioning for 66% of this year, through the month of May. The difference in short volatility conditions, and in the positioning of our indicator, is evident in the chart below.
Early May saw a surprising return of volatility - surprising because after months of headlines signaling positive developments in international trade negotiations with China, over the May 4th-5th weekend the US announced that the tariffs against Chinese imports would be levied after all, and that negotiations were headed nowhere. Our derivatives market stress indicator quickly turned bearish, and as a result our dynamic derivatives clients spent the rest of May in cash or US treasuries (depending on the strategy).