Market Outlook As Of October 27, 2019

First of all, since the second week of October we’ve seen a clear switch from growth and low-beta stocks to value stocks, just like in mid-September a few days before the market sold off nearly 4% in a short period of time. Today, I spot exactly the same. Positive divergence in the VIX index (last Friday, many April 2020 calls were bought by institutional investors, around 10,000 contracts in one time, suggesting someone is bracing for a spike in volatility and is looking for a hedge against this risk). Utilities sold off last Friday along with bonds, but I doubt whether this is part of a more substantial down move as money flows continue to poor into vast safe-haven assets. The S&P-500 is at an all-time high, but the range of the rising wedge becomes narrower, indicating a strong breakout is going to materialize. There is negative divergence in the true strength index, as well as in the MACD and Slow Stochastic Oscillator.

Gold is also preparing for a substantial move after breaking through its declining resistance line. As safe havens are set to break out, so does real estate because gold is strongly positively correlated with interest rates. That’s the main reason why I’ve added real estate companies to the portfolio last week (and lower beta stocks that show little positive correlation with the S&P-500) and why I have no issue being a tiny long these stocks. For instance, when the market sold off this year and last year, PSA, one of the REITs that’s currently in our short strangle portfolio, was capable of posting positive returns, something which favors long delta option sellers.

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