Breakout

Brace for a pullback by owning volatility now: Kilburg

Jeff Macke
Breakout

If it was any slower on Wall Street today time would actually be moving backwards. With Yellen and the FOMC not set to say anything until this afternoon and Amazon’s (AMZN) smartphone release not exactly setting the world ablaze, the S&P 500 (^GSPC) has spent most of Wednesday gently wafting above and below the flatline for the day. For the year that leaves stocks up a heady 6%.

The fact that stocks have already managed to post almost an average year’s worth of gains in just six months has made investors if not bored certainly complacent. In the attached video KKM Finanical’s Jeff Kilburg makes the case that these early lazy days of summer are a great time for prudent market participants to get some exposure to products linked to volatility.

Kilburg’s firm offers a new product called Armor Funds designed to address what he says are some of the shortcomings of current vol-products. Of course the biggest problem they all face is that the market isn’t moving in fits and starts but rather chugging along. As Kilburg sees it the FOMC’s monetary mollycoddling is going to make things pretty shocking to newbies once the stimulus spigot is turned down a little bit.

“Bernanke effectively took the market and put it in a Baby Bjorn and they’ve been nursing and taking care of this market for quite some time,” Kilburg insists. While they can’t really just walk away all at once the unintended consequences of even a slight misstep in terms of messaging is apt to lead to a brutal hangover for investors.

The idea of staying long volatility would be that it trades, at least in theory, at a high negative beta to the tape as a whole. “Look at what happened in January, when the market went down 4% volatility popped 25%,” notes Kilburg by way of making the case for a portfolio consisting of a mix of 80% stocks and 20% vol.

Naturally no instrument is suitable for all investors. In the bigger picture Kilburg thinks the S&P 500 has a date with 2,000. He just thinks stocks go below 1,900 on the way. From his perspective it’s better to be safe when others are getting greedy, something we’ve been seeing too much of lately in the stock market.

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