Range Bound Profits in a World of Information Anti-Symmetry

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Had enough yet? The whole world is range bound. It’s driving everyone in the office nuts. A range bound market is to investors like the doldrums are to sailors.


Day after day, day after day,
We stuck, no breath no motion;
As idle as a painted ship
Upon a painted ocean.

– Samuel Taylor Coleridge, Rhyme of the Ancient Mariner

The word ‘doldrums’ probably came from the 18th century. According to the source of all knowledge, Wikipedia, the word is derived from dold, meaning ‘stupid’ and -rum(s), a noun suffix used in words like ‘tantrum’. It describes the Intertropical Convergence Zone, which isn’t very windy. Ships used to get stuck there.

‘Range bound’ describes prices that move sideways. Coleridge would say investors are stuck upon a painted quotient. It’s tough to make money because the wider market isn’t going up or down. You have little to work with. That’s not to say you can’t make money. We’ll look at two doldrums investment strategies below. But first, are we really in the doldrums, or is this the calm before the storm?

ASX200 going nowhere
 

ASX200 going nowhere
Source: Yahoo Finance

Aussie Dollar vs US Dollar going sideways
 

Aussie Dollar vs US Dollar going sideways
Source: Yahoo Finance

Suspiciously Quiet
 

Have you noticed anything lately? Neither have we. The world’s financial markets have gone suspiciously quiet.

Sovereign bond yields no longer make the news. Politicians in Europe haven’t been embarrassing themselves quite so regularly. American politicians created problems like the fiscal cliff and debt ceiling just so they can look busy. And central bankers have been low key too. All of this is compared to the previous year’s shenanigans, of course. Back then all hell was breaking loose with bond yields above 7% and European politicians holding crisis talks daily.

The crisis talks didn’t change anything. Yet the financial market’s mood has changed completely. The VIX, or volatility index, measures expected volatility in the stock market. It’s steadily fallen, especially in the last few weeks:

S&P 500 VIX
 

S&P 500 VIX

 

It’s completely bizarre that a financial crisis can be put on hold without economic fundamentals changing. Well, they are changing actually. They’re getting worse. European countries are still running deficits. Their banks are still time bombs. Economic data like GDP and unemployment are getting worse in key countries. But the financial markets aren’t worried. What does that tell you about the nature of the problem?

Perhaps this phenomenon, we’ll call it information anti-symmetry, reflects the fact that markets are numb. They were beaten down by the plunge of 2008, beaten up by the central bankers in 2009 and squashed sideways by indecisive politicians since.

We’re calling it information anti-symmetry after the academic term ‘information asymmetry.’ That’s used to describe a situation where one party to a transaction knows more than the other. For example, the investment banks knew the mortgages in their CDOs were ‘junk’. They said so in internal emails. But the investors who bought those CDOs didn’t know it was a ‘shitty deal’.

Information anti-symmetry occurs when nobody cares about the information because it is meaningless. That can be because nobody wants to know, or the information is nonsense.

Who cares about the economy and its companies when central banks can print money and make shares and bonds go up in price?

We’ve entered a whole new level of surreality here. Not only is the free market gone, but so is the manipulated market. Now it’s just a manipulated and not a market.

But take a look back at the VIX. You’ll notice that it only rarelyreaches such a low level. And it tends to make a break upwards soon after. That means some stock market volatility is in the works. Whether we break out of the ranges established in investments around the world remains to be seen. But the market can only ignore the economy for so long.

How to Invest in a Range Bound Market
 

There are two strategies that work particularly well when the stock market is going nowhere. The first is to sit on a pile of dividend paying shares. You get paid to wait and the ups and downs of the stock market don’t bug you as much.

This is the strategy Money for Life Letter subscribers have been using. But with a twist that allows them to supercharge their dividends over time.

Just because markets are going sideways, that doesn’t mean a bit of speculation is a bad idea. The office might be bored with range bound markets, but that hasn’t stopped our fellow editors from racking up some good gains. The most shouts and dancing seem to be coming from Dan Denning lately. His recent palladium tip in The Denning Report is now up more than 100% in less than three months. The reason is a surging palladium price. Dan tipped his stock at the perfect time.

 

In a range bound market, one speculative strategy works particularly well. If you assume that the range will continue for quite some time that makes the price movement predictable. You can buy at the bottom of the range and sell at the top. That’s exactly what Dan did with palladium. He noticed palladium was trading near the lows of its range and tipped a palladium stock.

Here’s what Dan wrote to subscribers last October: ‘Palladium has traded in a range between $500 an ounce and $700 an ounce most of this year.’ And ‘palladium is near the bottom of its range.’

Now that the price is nearing the highs of the range, you guessed it, Dan’s subscribers took some profit. Only half profit for now though.

Looking back at the S&P 500, how would this strategy have worked for you? Once the range was established by the crashing end to the tech bubble back in the early 2000s, the market rallied back to the top of the range. If you sold out of the stock market at the top of this range, you would’ve avoided the GFC crash. As soon as the market reached the lows of the range in March 2009, if you bought back in, you would’ve made a mint since.

S&P500
 

S&P 500
Source: Yahoo Finance

The question is, will the range continue? Will the price movements remain predictable? We’re nearing the top of the range once more. Given that the Australian share market follows its American cousin to a great extent, this probably isn’t a great time to invest.

Nick Hubble
The Daily Reckoning Weekend Edition

Nick Hubble
Nick Hubble is a feature editor of The Daily Reckoning and editor of The Money for Life Letter. Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like. He then brought his youthful enthusiasm and energy to Port Phillip Publishing, where, instead of telling everyone about The Daily Reckoning, he started writing for it. To follow Nick's financial world view more closely you can you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails.
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