Put a Collar on your CAT
As I write this volatility report, I realize the Equity Markets have had what psychologist must dub a Nervous Breakdown. Where things were already on a knife edge and some event comes along and the mind falls apart. I view the S&P downgrade as something like that. There was thin confidence in governments of late and now someone said they need to get their act together. This was a surprise? Imagine if S&P did this in 2006 with Mortgage Backed Securities? Congressmen would have screamed at them for killing the American Homeowners dream. Either way, Sovereign Governments will have to spend less (or better collect revenue) because economies only generate so many dollars. The Politicians should thank S&P for giving them cover to do the
$1 Trillion per year in cuts that is needed. The change in spending alone will give the patient (market) the confidence it needs to get rolling again.
So what did this do to market Implied Volatility? It went through the roof and you don’t need a 3D Landscape to tell you that. When the S&P 500 moves at 5% per day, the VIX is going to soar and stocks are going to move in lockstep. So let’s go back in time to 2 or so weeks ago, prior to the breakdown and perform some hypnotherapy on the Dow and see what we see.
Anyone with a Bloomberg Terminal or a decent downloadable data feed can run AlphaVision™ for Excel. This chart setup is an expanded Time Series unique to Aqumin and provides a new way to chart market data. I have loaded the Dow 30 stocks in rows and measured the relative performance of each name. The Green Spikes are a 45% over performance and the Dark Red spikes are 30% underperformance. The rows are ordered by the relative performance starting from best (to worst). The best was CAT and the worst was BAC.
At this point you say big deal. I can see that in my Dow spreadsheet. Even if you did not know CAT was the Dow leader this year, BAC is not much of a surprise (it does look like capitulation now). However, with Aqumin’s 3D landscapes you can spin the charts around and get a new view below. The view now is definitely not how market participants can look at charts. You can see the last 2 weeks of all the charts at once. CAT is moving back very quickly to the pack even if the story has not changed. That is the market selling everything and possibly the best holdings more to raise cash.
CAT road the global growth story best all year since it sells the trucks that mine everything hungry emerging economies want. Its fall has been stunning (on an absolute basis) and the market is quickly relegating it to look like all the other names in the Dow. The relative performance is almost back to MCD (#2). Things are a little to fresh to just go out and buy the name. But CAT, properly fitted with a 3 month+ out option collar looks like a way to run when the name resumes with a bolt. The outperformer once will be the outperformer again and an option collar adds a trading piece should things get uglier in the short term.
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