Don’t Panic…Yet

One of the best-known quotes on investing comes from Jesse Livemore, who said:

“It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight!”

He died broke by suicide, which by no means should diminish the essential truth in his message; which was to be patient, and stay the course And in the age of passive/index fund investing, is even more applicable.

For the most part, in the past few years, it has been the “most hated rally ever.”  But, however precarious,  the seemingly best advice for longer-term investors is to simply stand pat.

As this article in Bloomberg highlights, investors have been inundated with the message that a ‘big comeuppance is coming’ and one should dump stocks and hide out in ‘safe’ assets such as bonds and gold.

And even stocks hit all-time highs — money flow data confirms that people are following this not-so-sage advice.  For the year to date, some $150 billion has been pulled from mutual and ETF funds while over $275billon has been put into bond funds

The painful irony is that in 2019, the U.S. stock market has gained some $5 trillion –that’s a ‘T’ in value.

Can you imagine what the gains might be if those flows were reversed?  Which may be why Larry Funk, the CEO of the world’s largest money management and ETF firm, continues to call for a market melt-up, as people remain underinvested.

For the most part, the lack of enthusiasm can be taken as a contrarian indicator as stocks can continue to climb a wall of worry. Look at how portfolio protection in the form of put buying continues to trend higher even as stocks climb.

Note: How portfolio insurance was at two-year low heading into the December sell-off. In fact, the increase of put protection now becomes a safety net, which would prevent a major sell-off.

Indeed, note how since the beginning of 2019 the pullbacks or drawdowns have become briefer and shallower as stocks have climbed higher.

So, while hedging could easily turn out to have been wise, so far it’s been money that might’ve been spent elsewhere.

As Jesse said, sometimes the best course of action is no action at all. Just let the flow take you, and right now that’s higher.

SPY shares were trading at $299.52 per share on Tuesday afternoon, up $1.62 (+0.54%). Year-to-date, SPY has gained 20.96%, versus a % rise in the benchmark S&P 500 index during the same period.

About the Author: 

Steve Smith has more than 30 years of investment experience and an expert level of options knowledge. He was a seat-holding member of the Chicago Board of Trade (CBOT) and the Chicago Board Options Exchange (CBOE) from 1989 to August 1997.  In 1998, he joined TheStreet.com as the senior option columnist and chief derivatives strategist. In 2003, he launched an option-based newsletter, OptionAlert, which was awarded the MIN “Best Business Newsletter” in 2006. In 2009, he joined Minyanville as a contributor and launched the proprietary OptionSmith newsletter. In 2010, he joined New Vernon Capital, a family of hedge funds with over $2 billion of assets under management, as risk market consultant to utilize option strategies to reduce portfolio exposure and enhance returns for the four main funds.  In 2015 he began working at the Adam Mesh Trading Group, where he currently authors the Option Sensei newsletter and manages theOptions 360 advisory service.

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About the Author: Option Sensei

Steve has more than 30 years of investment experience with an expertise in options trading. He’s written for TheStreet.com, Minyanville and currently for Option Sensei. Learn more about Steve’s background, along with links to his most recent articles. More...

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