Don’t jump out of the window yet… Volatility creates Value

There was a sense of decoupling in the stock market today. The broad market acted the way it did for two specific reasons; the deleveraging of hedge funds and a massive flight to quality. First, hedge funds were forced to sell assets with intrinsic value (profitable ones) to appease their prime brokers and possibly to raise money to cover short positions. The prime brokerage firms that handle hedge fund trades wanted less risk in the market place, for example making them lower their leverage from 10-1 to 5-1, decreasing exposure to risky assets. Second, the decoupling and uncertainty in the broadest sense prompted trader to find less risky securities. This flight to safety led to a massive 27bp drop in the 3month T-Bill, which closed at the lowest in FIFTY YEARS at .61 percent. Moreover, the 10-year closed 9bp lower. All of this caused the selloff in commodities (gold, crude, cotton, etc.) and the stock market. Which leads me to my title, “don’t jump out of the window yet”, the ground rules still apply and most technical indicators give support to prices, this move in the market has a strong chance to gain ground tomorrow. I will leave you with this; when investing, particularly in commodities, you do so with a fundamental and technical basis, than you need the patience and resolve to ride out market fluctuations. Especially in volatile markets.