Following the biggest sell-off in the equity market since April 10th of last year and with many investors stunned like a deer in headlights, Dylan Ratigan joins Tom Sosnoff in the tastytrade studios to discuss the opportunities that Tom sees given the present market conditions and where we go from here.
This is a terrific segment and in my opinion, one of the best episodes of "Truth of Skepticism" to date. Throughout this series, Dylan’s questions have provoked a very thoughtful conversation around the tastytrade investing philosophy, and have given traders unfiltered insight into both Tom’s and Dylan’s perspectives on finance and investing.
During this episode, the pair also discuss the recent sell-off in the market, opportunities in fixed income and equities, and finish with an intellectually stimulating conversation reminiscent of classic Dylan Ratigan.
What Can We Expect in 2015?
We’ve seen a strong bid in the bond market since the end of February, and the bond market has also been the subject of considerable debate recently with the prospect of the Federal Reserve raising interest rates.
The Bond Market
While Tom sees tremendous opportunity in the short bonds and stocks play, throughout history there’s typically been an inverse relationship between these two asset classes. About 80% of the time, when stocks go up bonds go down, and vice versa. While not the historical norm, at the moment, bonds and stocks have a positive correlation. Tom believes that at some point their negative correlation will return, but for now, the short-short opportunity is blatantly obvious.
How Would You Trade That Information?
Everyone understands the directional bias... the market is at all time highs, we’ve been in a very strong bull market, and the contrarian play is that the market goes lower from here. We know that nothing goes straight up and nothing goes straight down and a correction is a reasonable assumption, but why is it that at tastytrade we place such an emphasis on premium selling and using implied volatility rank as a metric? Tom explains…
While traders favor days like March 25th’s one hundred plus point loss in the NASDAQ and double-digit drop in the S&P, it's moves like these that cause the typical investor to question conventional wisdom. Conventional wisdom being that “the trend is your friend.” Dylan Ratigan argues that even though these are painful days for passive investors, it’s these movements in the market that distract passive investors from the longer term upward trends in equities. As a result, this entices them into being more active, leading to missed opportunities in the long term.
So What About Conventional Wisdom?
Our fundamental argument for active investing is that it gives us the opportunity to be above average. Who wants to be average? Taking a look at the market, it’s basically unchanged for the year, but for active, contrarian investors, taking advantage of the swings in the market presents an opportunity to be above average.
To wrap up the show, Dylan makes the point that there aren’t more active investors out there and one of the primary reasons is because the tax code does not facilitate active investing. He argues that the tax code is set up to make it as intimidating and expensive as possible to actively invest and it’s the consequence of a corrupt tax system.
The Current State Of The Tax Code
This is just a taste of the conversation, but make sure to check out the full 30-minute episode by clicking the button below.
To see more episodes of Truth or Skepticism with Dylan Ratigan, go here!