Yo Pit Crazies,
2022 was the year of the snap rally.
That, sadly, is a sign of bear markets.
And this was a bear market year by my calculations, with the SPX down near 20%.
One of the themes for 2023 will be the income trade.
You see, unless the current arc of Big Policy changes, we will see similar performance for SPX in 2023, just not as bad and not as volatile.
Here’s why …
Volatile Years Are Rarely Followed by More Volatile Years
Note Vol Man is surfing the low vol tick during Donald Trump’s tenure in 2017.
SPX 90-day realized vol in blue; SPX chart on top for the last 10 years.
I can recall vol that low in 2007 and 1991/1992. Normally, realized volatility (in this case the 90-day average) returns to the single digits after a period of activity.
Remember, 90-day volatility is just the close-to-close move on the SPX over the last 90 days on average. Right now that is running around 25%, or a 1.5% average daily close-to-close move in the SPX.
For context, that is the highest VIX quartile of activity – every day.
Fed Chair Jerome Powell is rightly trying to break the easy money of the last 10 years and especially of the last three. That has predictably caused some tectonic shifts in equity markets. It is also clear this vol event is not over. It won’t be as severe in the months ahead, but it’s not over.
That is the major reason I think we will have lower vols in 2023, for the simple reason it has not carried a two year period before.
That means minimum risk with max reward potential.
Happy New Year and here is to a bright 2023!
To Your Trading Success,
AG