Market Inflections – What are they with an example.
In this article I’m going to discuss what market inflections are since much of what we believe in revolves around that. Inflection investing typically marks the shift in a market cycle, policies or some sector that is undergoing changes. Those changes can be both positive and negative and can lead to repricing of an asset class or stock.
So let’s take that a step further and talk about market inflections. When I say market, I mean the S&P500 and the other major US stock indices, so we are clear. The market at large can see both technical and fundamental inflections and I am going to explain a technical inflection next.
In The LongVol Report in 2022, early September we spotted an idea where the S&P500 along with the Russell 2000 could lead to “breakdown to bounce” scenario. Where the news was consistently bad but market-timing laid out a potential market inflection ahead of time.
What was spotted before that was the potential entry ahead of time so that it allowed for:
- Portfolio construction
- Risk management
- Hedging as needed
The October lows to end of year rally was what we were looking for. From that point the market (S&P500) rallied north of +20%. This is a market inflection – a technical and market-timing overlay combined with a thematic tailwind (economic data) set this scenario up. Below are notes from The Long Vol Report from Septmber 18, 2022.
Now that is, call it, half of the analysis. The idea was that there was a potential inflection coming in the market where a subsequent rally would form. The second half is then taking said idea and expressing that view. Most in DeltaOne manage their own books as they see fit based on duration, risk (capital available) as well as their personal investing goals so the structure of the idea, ultimately, comes down to each individual.
However, with this market inflection we discussed expressing the idea through ETFs and Index call options as a way to capture alpha. Were there other ways to express this view with say individual names? Yes of course but given the analysis on the underlying names and macro cycle we were/are in the best path forward was through the use of ETFs and Index calls.
So this is one way to drive returns v. say, finding an individual stock and looking to buy and hold. For those reading these articles this would be categorized as a trade not an investment.
