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Chicken Little vs Chicken Hawk

Posted by kdadmin on June 20th, 2013.

On the longest day of the year, I thought you might enjoy a little market perspective to keep it from becoming the longest night of the year as well …

Remember Chicken Little of nursery rhyme fame? He was the little bird that ran around the barnyard, hysterical about how the sky was falling.

This is how the market has responded to the Fed’s comments this week. Even though the Fed made no changes and reiterated the timing of its QE policy, everything was down, or highly volatile, on news of doom and gloom. It was all Chicken Little, all the time.

Well, it was, until it wasn’t …

Do you also remember the Henery Hawk character from the Foghorn Leghorn cartoons? He was the pint sized chicken hawk determined to get his first chicken, even if Foghorn Leghorn was 20 times his size, and a rooster. He was tenacious, determined, cunning, patient and, ultimately, successful.

In typical fashion, professional investors (who possess patience, staying power, and perspective) waited until the market dipped down to attractive level and bought back in. In other words, the Chicken Hawks (professional investors) feasted upon the ravaged portfolios of the panicked market traders (Chicken Littles).

Case in point: The attached chart shows the relationship between SPY (an ETF representing the S&P 500 that many of us own) and VXX. The blue shaded area is SPY and the red line is VXX, which, if you remember from last time, is a measure of implied volatility (fear) in the market. This chart covers the period from the last Fed announcement (mid April) to now. Notice anything?

Picture

– (All data courtesy of Yahoo.com)

In mid April, when the Fed made their last announcement, the VXX spiked quickly up and down. It has recently spiked up again. When do you think the “Chicken Littles” sold and when do you think the “Chicken Hawks” bought in? Just look at the spike in the VXX. The spike up represents panicked selling and the spike down represents opportunistic buying.

As for this week, when it was all said and done, on Friday afternoon the VXX was down 6.4% off the peak of its spike up, and the S&P recovered about 0.3% of its 4% weekly loss to finish down about 3.7%. As usual, your portfolios survived the storm better than the S&P. On average, your portfolios experienced about a 1.7% swing.

Isn’t it nice to weather a storm with less than half of the market’s volatility?

Happy Solstice!

p.s. I imagine you probably know a Chicken Little or two who would rather be a Chicken Hawk. If you think they could benefit from a sound investment perspective, please introduce me.

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