The Ultimate Source of Truth
By
Leo Valencia
We are seeing very encouraging signs of an end to this crash environment. After about more than a month, intraday realized variance is dropping really hard and the market has managed to tag the GT level again and it has flipped into a long gamma hedging regime.
I know that many of you can’t reconcile the fact that the market seems to be getting ready to start flying again with what is happening in the real economy after the shutdown and the uncertainty of the novel Corona Virus pandemic. However, despite all appearances, this is very normal, it is basically a stylized fact of the market that is very important to learn. Remember this mantra folks: The Market is not the Economy. It has happened many times in the past (1987, 2008/2009)
Most traders tend to conflate both because at the end of the day the market is made of real companies, with real products that are sold in the real economy. However, market valuation has nothing to do with the real economy. Despite years of theoretical work economists have not been able to come up with a correct valuation model and that is expected. The main reason is that the fair price of any stock is whatever the market says it is, period, nothing else matters, if traders agree that TSLA should be priced at $712.44 then that is the answer. There is no need to look for a DCF model or Fama-French, the ultimate source of truth has spoken.
The same happens with an index like the S&P 500. It is at 2837 SPX right now and that is the ultimate source of truth. We as traders should only listen to that truth and forget about the rest. Are we going to be in a recession soon? Yes. Is unemployment going to skyrocket soon? Yes. Will earnings suffer for the rest of 2020? Yes.
However, it doesn’t matter, the market has spoken, the value of the market is what the market says it is in this precise moment and nothing more or nothing less. Good traders listen to the truth as spoken by the most powerful valuation machine in the planet. Try to ignore your preconceptions and just listen to SPX.
