SPY 1d/1m (9/29/2016)
This is a snapshot of the performance of the ETF that tracks the S&P 500 today. Do you see anything abnormal about SPY’s RSI at about 12pm CST?
In looking at a 20d/1hr snapshot, we can see that the price of SPY has been recovering since September 10th, however, by knowing the actual reasoning behind today’s sell off, we can assume that this recovery may be short lived.
While looking at the 3mo/d chart, we can see that RSI is downward sloping (meaning investors are selling at lower and lower prices faster than buying at higher and higher prices). If we look at Money Flow Index (MFI), which measures the speed of money inflow and outflow into a specific security, we can see that over a longer period of time, investors are slowly exiting out of SPY while it is low off of its 3 month high of 219.60.
Now the important question:
What does this mean?
SPY is an exchange traded fund that tracks the S&P 500 (pretty much the entire US equity market). By observing its technical indicators, we can get a sense about how millions of other investors feel about the market over any given period of time.
(Aside from the actual S&P index [SPX]), SPY should be the first security you look at on any given day. It will tell you how investors around the world are valuing the market, and it will also reflect any major change in social, geopolitical, or financial status of the United States and its many many publicly traded companies.
When deciding how to allocate your client’s money, you should ALWAYS check the entire market first. Understanding market conditions is key to being successful in producing adequate returns. SPY will always tell you the current state of the market, and if you take a position in it, you will be exposed to the entire equity market.
In the Global Asset Management Program, it is very important that you diversify your exposure. What does this mean? It means “don’t go all in on AAPL because you like the iPhone 7”. Your client’s account should NEVER be held up in one company due to the inherent risk that is associated with this position. We’ll get into risk management later, but right now, it is recommended that you base your portfolio on SPY. By holding this security, you not only guarantee complete diversification, but you will always benefit from the progress of the whole market.
But wait, check the conditions first.
Sometimes SPY isn’t the best thing to hold. For example, today we experienced several hedge funds exiting Deutsche Bank, which shook the entire global financial system. So in this particular case, a major global event can wipe your account out. (Other examples: Brexit, Turkish Coup de tat, US Elections, Terrorism, etc.)
So how do you protect yourself from this inherent, systemic risk of Murphy’s law?
Portfolio Weighting.
There are thousands and thousands of ETFs, as I’ve said before, but some ETFs are the most important of all. (Well… important to me)
First, let’s talk about the CBOE VIX index.
The Chicago Board Options Exchange Volatility Index measures the amount of “volatility” in the marketplace. Volatility is basically radical changes in prices all across all sectors, and by using ETFs that track this index, you can insure yourself against any systemic risk that is bound to happen.
Now obviously, this doesn’t have to be used as insurance. This can simply be a way to boost performance during bad market days, as I use them. Volatility will always happen when things look bleak and investors are uncertain.
TVIX 1d/1m (9/29/2016)
Here you can see how right after hedge funds liquidated their positions in Deutsche Bank, TVIX (a 2x leveraged ETF that tracks VIX) spiked astronomically. This is a direct inverse correlation with the performance of the overall market.
Now these are slightly complex financial derivatives, but when used appropriately, you can maximize gains even when a financial crisis is occurring.
Honorable Mention: (SPXL,SPXS,XIV,VXX)
Now I should also mention briefly that these instruments are usually catalyst driven. Meaning, in times of crises and/or financial jubilation, these could swing incredulously. It is very important for you to understand global economic conditions and ongoing geopolitical conflicts in order to fully benefit from these ETFs.
Lastly, I just want to inform you that these instruments aren’t the only market tracking ETFs. There are market tracking ETFs for almost every country around the world, and when used appropriately, you can strategically gain from global events at any given time around the entire planet.
That said, I want you to specifically use SPY as the base of your account, so that you are always diversified, and always exposed. Choosing when to enter/exit is the tricky part.
As you get more and more familiar with portfolio weighting and global macroec strategy, I will introduce you to even more complex and profitable strategies in the future, which will aid in keeping your client in the green and your wallet happy.
-Agee
Auburn University Global Asset Management Program 