Bill Gross, a famed bond fund manager of Janus Capital, explained in the Twitter account of Janus Capital about how to trade in the very volatile stock markets.
Earlier this year, Mr Gross also successfully predicted the bear market in German bonds and the plunge of the Chinese stocks. He is without a doubt one of the greatest investors who correctly understand the market situation before the Fed’s rate hikes, the opinion of whom is worthwhile to follow.
He has been insisting the financial markets are completely broken and too much addicted to the artificial liquidity due to the worldwide quantitative easing. He compares the markets to a casino and suggests a trading strategy as in a casino:
How to invest in a casino-like market? Mimic the casino. Assume equity markets, for example, very volatile, but bounded by the deflationary economy on the upside and reflationary monetary policy on the downside.
He insists there is a restricted price range in the equity markets. This viewpoint resembles our views explained in the following article:
After the stock market lost its direction, in order for it to restore a certain trend, it has to trigger the central banks’ action. It could go up to lead to rapid rate hikes or go down radically to long for further easing.
As many great fund managers have also been keeping their short positions expecting a turmoil, efficient investors somehow seem sharing their market views. Mr Gross also suggested the bear market in the commodities implied a deflationary force in the global economies, which we also pointed out.
- The commodity market crash leads to worldwide deflation: gold, crude oil, natural gas, copper and iron ore
Back to the main topic, what should we do in the equity markets from his viewpoint? He explains as follows:
Buy volatility inside the boundaries, sell vol outside the boundaries. Make sure you have the boundaries right – Good Luck!
Buying volatility means buying options, and selling volatility means short selling options. He explains this kind of trade strategy quite cynically; he implies he would not trade in this gambling way.
Whilst he is a bond investor, however, this is a place to discuss global-macro investment strategies. If we know the boundaries according to macroeconomic analysis, we do invest with that view. There is no taboo in global-macro investment.
Then, where will be the top of the boundaries? As we have been bearish on stock markets even before the turmoil since August, we consider the top as the peak of this year or, at the highest, 10% higher than the peak. Where will be the bottom then? We already explained in the following article:
We also regard the markets these days as quite ridiculous, yet if there is an opportunity in the markets, we bet some on it. However, we would not bet largely on it. The time to be “the balls to the wall bullish” is over, at least until the central banks move again. This is for sure.