MorningWord 11/5/13: If the S&P500 were to end the year at last night’s close of ~1768 or higher, the ~24% ytd gains would slightly best the 23.5% gains of 2009, and would represent the best return since 2003 when the index was up 26.3%. What’s interesting about 2003 and 2009 is that both sets of performance came a year after the 2 steepest declines in the index in the modern era (2002 down -23.37% and 2008 down -38.47%), while 2013’s gains come after last years healthy 13% return, which believe it or not has been about the median return since 1970.
Many market participants liken the current bull run that we are in to that of mid to late 1990s where the index made new closing highs on the end of each year from 1995 through 1999 registering returns of 34% in 1995, 20% in 1996, 31% in 1997, 26% in 1998 and 19% in 1999. SO where are we? Who knows, I am not sure why traders love to try to pound the current situation into some memory of years past. Yesterday in this space I wrote of all the bubble talk of late (MorningWord 11/4/13: There Is A Bubble Forming In Calling A Stock Market Bubble), and my conclusion is from where I am sitting the current environment doesn’t feel a whole heck of a lot like 1999, possibly more like 1998, and if everyone and their mother is talking bubbles, it ain’t likely to burst in the days/weeks to come… more like months, possibly many months. (Probably not years)
Not sure how that is gonna help me make money in the short term, but sometimes it helpful to put the current market sentiment in some context, without trying to pound a square into a round hole.
As we head into year end, with only 37 trading days left, in a period where volumes could start to abate around the Thanksgiving, Christmas and New Years Eve Holidays, much attention will be given to whether or not investors chase performance, mark up winners or look to lock in gains. From where I am sitting equity volatility looks fairly low (Enis had a great rundown yesterday in his VIX Futures Snapshot – here) detailing the fact that traders expect volatility to stay subdued for the balance of the year.
In this environment we are starting to see some options look very dollar and vol cheap which lends itself to a situation where, no matter what your inclination into year end, options could provide a way to lever up best ideas for a run to new highs, lock in gains with stock replacement strategies or protect your portfolio as a whole with index puts or spreads. Yesterday’s AIG Name That Trade was one such example. We’ll be sure to lay out such structures as we see them. They’re not necessarily all trades that we’ll be doing ourselves. For the sake of idea generation and the relative value discussion (both among stocks, and between stocks and options), we hope you find them useful.