“The Pain Trade Is Always Down In The End”

Volatility-selling activity is continuing to drive the short-term performance of the S&P. Starved for yield, Ice Farm Capital’s Michael Green explains that investors are selling volatility against their equity positions – and likely feeling their greatest risk is an upside move that takes them out of their underlying position. Against this, however, Green warns, the volatility selling is leaving them much longer than desired on a sharp down move. While current FOMO (fear of missing out) dominates, it’s important to remember that the pain trade is ALWAYS down.
As an aside, we note that the underlying trends of volatility-selling or buying minimum volatility ETFs, in some systematic belief that herding into this strategy will reduce risk. As Green details…
The flaws in human emotion and bias are often cited for reasons to embrace ‘passive’ or systematic investing. Unfortunately, unless the allocation is truly passive (meaning ALL securities in equal proportion to their existence) as I have discussed over the last few weeks, it simply becomes another form of active speculation – this time around driven by a one-time decision by someone embedded in an ETF machine rather than the thoughtful attempts by a highly skilled analyst. ‘Allocate to solar? Which solar? Let’s pick the large and liquid names at the creation of the index and embed them through a modified cap weighted index.’

This post was published at Zero Hedge by Tyler Durden – Jun 6, 2016.