This guest commentary was written by Mike Shell. It was originally published on ASYMMETRY® Observations on 11/24/20. 

The Stock Market Uptrend Is Strong, But It’s Entering A Higher Risk Level - 06.05.2020 F in nuts cartoon1  1

The year 2020 has been quite a ride for most of us.

It started out with the stock indexes trending up, then collapsing over -30% in March. Now, the stock market proxies are reaching new highs.

The Stock Market Uptrend Is Strong, But It’s Entering A Higher Risk Level - image 1

Clearly, the trend is up recently, and we’re in this trend.

Overall, these volatile conditions has been hostile for both active and passive strategies.

I’m about as active, tactical, as it gets, and even I’m not thrilled with 2020.

I normally enjoy volatility expansions and such, but this one has presented unprecedented risks from the uncertainty of the global pandemic, but also the risk of price shocks as we saw in March.

Oh, and then there was a contentious Presidential Election.

The risk now is a price shock driven by the enormous stimulus because of the uncertainty of how it will all unfold.

It’s all part of it, and I do embrace uncertainty. I enjoy watching how a movie unfolds, and don’t like to know in advance, even if I could.

I just keep doing what I do; adapt, improvise, and overcome.

It is what it is.

Speaking of volatility: the CBOE S&P 500 Volatility Index (VIX) signals expected volatility is evaporating. The VIX has contracted back down to near 20 again, the same range it reached in August. So, the demand for the protection of options is declining.

Sometimes it’s a good sign, and the volatility contraction could continue. Notice in January and February the VIX was at 12, today it’s nearly 22, so it’s elevated.

The Stock Market Uptrend Is Strong, But It’s Entering A Higher Risk Level - image 2

I’m on guard to protect my profits, so I actively monitor risk and sentiment indicators to see when the potential for a price trend reversal is more likely.

I think we’re starting to get there, but we’ve got aggressive stimulus acting as a put option.

It could keep going.

But, the percent of stocks in the S&P 500 above their 200 day moving averages measures the breadth of participation in the uptrend. Right now, 90% of the 500 or so stocks are in longer term uptrends. That means only 10% are not in uptrends. This strong breadth is a positive sign for momentum, but once it reaches such a high level I begin to wonder when the buying enthusiasm may dry up.

The Stock Market Uptrend Is Strong, But It’s Entering A Higher Risk Level - image

After most of the stocks have already been driven up, we have to wonder when the bullish sentiment reverses to selling pressure.

If you want to realize profits, we have to take them at some point. Unrealized profits are just the markets money, and can fade away quickly, and even become a loss.

That’s all I’ll share for now. I’m just seeing some signs of what may be becoming an inflection point.

I’m usually more early than I am late, so we’ll see how it unfolds from here.

Investors who are inclined to actively manage risk may start considering reducing exposure or hedging off the risk of loss.


Mike Shell is the founder of Shell Capital Management, LLC and the portfolio manager of ASYMMETRY® Global Tactical and ASYMMETRY® Managed Portfolios.

This piece does not necessarily reflect the opinion of Hedgeye.