What has changed? Global trends, volatility expansion and contraction, plus some rising interest rates

My focus is: What has changed? if I see no change in the direction of the trend of volatility, then we just go with the flow.

Realized (historical) and implied volatility (VIX) has settled down on the and it’s reflected in a Bollinger Bands contraction.

Periods of low volatility are often followed by periods of high volatility.

The empirical evidence is observed visually in this chart.

SPY SPX VOLATILITY MOMENTUM TREND

Volatility trends in cycles up and down, so they oscillate between high and low levels and can reach extreme highs and extreme lows. I believe volatility expansions are driven by indecision and vol contractions are driven by complacency decisiveness.

Small-cap stocks have been leading the way trending with momentum, but they’ve also declined a little more the past few days. Like the S&P 500 the Russell 2000 is showing contracting volatility after a big volatility expansion.

small cap momentum RUT IWM trend following system

Gold has been trending up gradually. I focus on the rate of change and momentum. However, recently Gold has declined sharp enough to indicate a short term volatility expansion.

gold gld $GLD

Emerging Markets has less of a rate of change than the higher momentum U.S. stocks, but volatility is also contracted.

EMERGING MARKETS TREND MOMENTUM

After a killer uptrend and momentum expansion last 2018 when stocks were falling, the Long Term Treasury ETF (TLT) has settled down into a non-trending period. It’s dropped below the volatility band, so maybe it will reverse up again. TLT is an example of a non-trending low vol condition, so we’ll expect a breakout from this range at some point.

TLT LONG TERM TREASURY HEDGE ASYMMETRIC RISK REWARD

Wanna see an example of an uptrend with low volatility? ETFs like SHV is a short-term  U.S. Treasury bond ETF with remaining maturities between one month and one year. It’s smooth, but with low risk, comes low potential reward. However, it’s a good example of a defensive position when it’s time for Risk-Off. It’s also probably a competitor to bank CDs and money markets.

SHV SHORT TREASURIES TREND VOLATITLIY MOMENTUM YIELD

Before you get too excited, here is the growth of $10,000 invested in the iShares Short Treasury Bond ETF (SHV) 10 years ago! With interest rates so low driving down the yield, it only grew to $10,380 because the interest rate was so low. 

shv

The good news for low-risk savers who invested their money in Treasury Bonds, their interest rates are trending up, so the yield is increased to nearly 2%.

Yield on Short-Term U.S. Treasury ETFs
That’s also good news for active risk managers like myself who increase and decrease exposure to the possibility of loss. Now, when I shift to defense and rotate from stocks to safer cash-like investments, we’ll actually earn some yield as wait for trends to improve. As you can see in the charts above, any defensive exposure intended to avoid risk temporarily didn’t earn the yield the past decade we did before. Unless we used higher yielding riskier positions for defense, it reduced our total return the past decade so look forward to getting that edge back.

Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Global Tactical.

Mike Shell and Shell Capital Management, LLC is a registered investment advisor and provides investment advice and portfolio management exclusively to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and are not specific advice, research, or buy or sell recommendations for any individual. Investing involves risk including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information provided is deemed reliable, but is not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. Use of this website is subject to its terms and conditions.

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