Flow Traders Investment Competition: The Big Sell-Off

Another dynamic week has passed in the Flow Traders Investment Competition. The week started off rough, with major indices in the red. A moment of relief seemed to be around the corner in the middle of the week, only to be followed by a sharp correction on Friday. No Investment Group was able to take advantage of this turbulent weeks and make a profit. The major stock sell-off has cost all Investment Groups a total of over €4000, that would have been lot of beers at this week’s Carnaval drink.

Not only B&R Beurs has suffered from a tough week. With the Dow Jones, S&P 500 and DAX all down by more than 4% over the week – their worst week in two years – the fortunes of the 500 wealthiest people dropped by $68.5 billion on Friday alone.

On the contrary, some volatility traders may be more festive about the recent developments. Although the S&P 500 is up more than 3% in 2018, last week’s market tumble caused the VIX (Volatility Index, which indicates overall market volatility) to hit its highest level since November 2016. Not all volatility traders reaped the benefits of this spike. Investors betting on the so-called short-volatility strategy, in which traders bet on low turbulence in the market, experienced a big loss. The 29% surge of the VIX last Friday caused a 13% plunge in the ProShares Short VIX Short-Term Futures ETF. According to Bloomberg, about 27 million shares changed hands, the most since the Brexit vote.

The question now is, how concerned should we be? Views vary from confident traders rushing to buy the dip, to warnings of mean reversion, with bearish traders claiming that selloffs that begin in the bond market have a habit of snowballing. Inflation is starting to pick up, and markets start to realise that the Fed is going to have to move the interest rates. According to Joe Kinahan, chief market strategist at TD Ameritrade, this threat of higher Treasury rates is worrying investors the most. “And that’s been a big reason for selling.”

Not all stocks experienced a bad week, however. Amazon (AMZN) closed 1.55% higher as their earnings beat most Wall Street estimates. Following this, a number of analysts raised their price target for Amazon shares.

Ironically enough, last week’s sell-off occurred during one of the best corporate earnings seasons in the S&P 500 ever. Data generated by Bloomberg show that profits of companies in the index have increased from $145.90 (15 Dec.) to $156.20 a share. Such a rate of increase has not been seen since 2012. According to the financial news company, this data should calm investors fearing the S&P’s high P/E multiple, derived from 2017 profits. Using 2018 estimates, stocks trade on a slightly lower multiple of 17.7.

None of the Investment Groups managed to get positive returns this week. Especially Porto d’Oro took a big hit. With the AEX losing about 4%, they lost over 10% of their investments, using long turbos on many Dutch companies.

Written by Joppe de Bruin