Friday, November 15, 2013

Oh Dorothy...

"Toto, I've a feeling we're not in Kansas anymore." 
One of the biggest misconceptions about the VIX and one that was further strengthened by the recency effects of the Financial Crisis, is its perceived inverse correlation with the given trend of the equity markets. Although we'd agree that correlations ebb and flow like the landscape backdrop of a meandering transcontinental train ride, for us the VIX appears to be bearing a position just beyond the Great Plains - and beginning to make its way up towards the majesty heights of another Great Continental Divide. - Taking a Transcontinental Ride on the VIX
We expect the VIX to have found a floor this week and trend higher through the balance of November. Similar to the previous cycle, we continue to work from the perspective that the VIX made a cyclical low at the end of the 1st quarter and will begin walking - albeit gradually - with the equity markets.
Taper-talk introduced by the Fed this spring closed the performance differential between the TNX:SPX ratio and the previous cycle. We like the idea of buying the 10 year Treasury note here. 
We also continue to favor the financials relative to the broader market. 
Like the previous cycle (although to a much lesser degree when compared with actual performance) the higher beta Nasdaq continues to gradually work off the build that began in Q2.