ROI Note October 2008

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The Oct 2008 stock market crash caused the Iron Condor strategy to have a large loss. The cause of the Oct 2008 crash was from the eventual collapse of Lehman Brothers, a large New York based Investment Banking Firm, which sent shock waves around the globe and caused the US stock market to drop 35% in 14 trading days. Prior to the collapse of Lehman Brothers, however, macro-economic indicators were showing that the US economy was gradually deteriorating from as early as mid-2007 and then started to rapidly deteriorate after July 2008.

By monitoring US macro-economic data it would have helped us reduce our downside exposure, trigger us to open some hedge positions, and ultimately would have helped reduce our losses. Therefore, in order to reduce the probabilities of this happening again we now monitor dozens of macro-economic indicators on a weekly basis, which provide us an ongoing view of the underlying health of the US economy – a process called Market Timing.

Market Timing is the science of analyzing macro level economic indicators along with other “big-picture” data to predict the beginning and end of recessions, the future direction of Treasury bonds, gold, crude, currencies, certain commodities, and the stock market. Market Timers are usually very experienced market analysts and/or economists that each have their own favorite indicators and/or proprietary indicators that they’ve invented themselves. The market timing community has been followed for dozens of years by publications such as Timers Digest and TimerTrac. Our team spent a lot of time watching several of these experienced prognosticators and then came up with our own mix of macro-level economic and investor sentiment indicators to help us better time our entry and exits of credit spreads and to help us decide if/when we should be sitting on the sidelines to reduce our downside exposure.