Daily Brief - Is a 20% correction coming? (Oct 21, 2021)

Ah, here we go again. What’s the permanent fixture in a bull market? The recurring “a correction is coming” wave of articles.

That’s understandable. Fear of a drawdown affects any rational investor: “I made 20% in a quarter, should I take profit?” (we of course we exclude from ‘rational investor’ our readers who participate on WSB, cue this topical post).

So is a drawdown coming? And does it really matter?

The answer is, of course, one of horizon.

For short term traders

If you are trading short term then we have two messages for you. For one, positioning in SPX is long again, albeit nothing that warrants a major retracement. Also VIX at 15x is cheap-ish, but timing a Put trade is always a tricky effort.

If you want to try a short trade, we’d wait for spec positioning to rally back to higher levels that might warrant a serious retracement. That will make puts even cheaper.

For traders with longer horizons

We go back to the discussion we had about inflation and the Federal Reserve. The dovish tone of the last FOMC is far from nailing the coffin on equity upside, and the crypto space seems to be doing extremely well, especially in view of inflation.

If your style is not to time the drawdowns, then we’d advise to keep your asset allocation. If you like to buy drawdowns, then maybe some value plays might allow you to keep “dry powder” to reinvest.