The most significant change across my favourite market charts in the past few weeks is the fact that the US 60/40 portfolio is now eking out a small positive gain on a six-month basis. Chart 01 shows that my in-house 60/40 index—using the S&P 500 and the US 10y note—is now posting six-month returns to the tune of just over 1%. This reversal from a nadir in six-month returns of almost -20% earlier this year is driven by both stocks and bonds. The S&P 500 is up a bit over 10% since mid-October, and ten-year yields are off their highs. This, in turn, invites the question of whether we’re seeing the beginning of a reversal in the decline in stocks, and rise in yields, which have haunted investors this year. I wish I knew. To get at an answer to the question, however, it’s best to separate the equity story from the bond market story, at least to begin with.
Read MoreNormally put options serve as protection for large, mainly long only, asset managers. Picture an investor committee meeting at a large pension fund in the wake of a equity market drawdown. The core portfolio is down, but the astute and prudent portfolio manager dodged the bullet by buying put options on the market or the funds individual stock holdings. This is the way it would normally work, but there is nothing normal about the current market.
A WSJ piece by Ben Eisen and Aaron Kuriloff this week alerts us to the topsy-turvy world of financial markets in an environment where the "reach for yield" is the only game in town. In short, in a desperate search for regular income and "yield" some pension funds in the U.S. are turning to the nuclear option of selling put options. I will let Eisen and Kuriloff describe the madness;
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