'This is now a new era': A Wall Street quant guru says FOMO is driving 'very strange' behavior in markets - and describes how he's positioned to profit from the anomaly
- Wayne Himelsein, president and chief investment officer at Logica Capital Advisers, thinks the amount of greed and excitement in the marketplace is giving way to an anomaly he calls "panic buying."
- He advocates for a systematic, risk-mitigating approach that consists of applying two different investment philosophies simultaneously.
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Today's market environment is anything but normal.
Stocks are a hair's breath away from all-time highs, unemployment is hovering near a 50-year low, and gross domestic product is growing at a healthy clip. Yet the Federal Reserve just cut interest rates for the second time since July, and suddenly there are liquidity issues popping up in the repo market.
This doesn't seem to make any sense on the surface - and the strange mix of market forces has created an environment where investors are behaving in ways they normally wouldn't.
"The amount of greed or excitement is causing an upside-down behavior versus the way emotions should behave," Himelsein said in an exclusive interview with Business Insider. "We should be panicked in sell-offs, but instead we're panic buying ... it's very strange to say the least."
He's confounded by this trading mentality. It seems to him that investors' fear of missing out is getting the better of them, and resulting in aggressive run-ups.
You may have heard the age-old adage on Wall Street that says stocks take the stairs up and the elevator down - a slow churn higher, followed by a swift collapse. But according to Himelsein, in recent years, the exact opposite has been true. Markets have shot up quickly, followed by a slow sell-off.
"This is now a new era," he relayed. "A lot of protective models would encompass behavior of the prior - meaning harsh collapses. We're now looking at how do we encompass these aggressive run-ups."
But Himelsein built his career capitalizing on market inefficiencies caused by behavioral biases. And where there is irrationality, he also sees ample opportunity.
How he's positioned
For starters, Himelsein stays agnostic to the future. That means he doesn't try to make market calls, and doesn't concern himself with any macroeconomic variables like interest rates, employment, or inflation. There are simply too many to try to quantify, so he doesn't bother wasting his time trying to incorporate them into his model.
With that in mind, he employs a systematic approach, and runs two models simultaneously. One is mean-expansionary, and one mean-reversionary.
If you agree with his thinking, an approach you could employ would be to go long technology stocks to ride the expansionary trend in that sector. Simultaneously, an investor could also purchase energy stocks, as they look cheap compared to historical averages, which represents the reversionary portion approach.
Not only are you in two different sectors, you're also straddling two different philosophical schools of thought.
"It's almost analogous to talking from both sides of your mouth," he said. "There are good positions to be had on both sides of that."
In addition, Himelsein mitigates the risk of making an errant call through the use of options.
"The beauty of an option instrument is that you are naturally convex to payoffs - or to gains, and concave to losses, he said. "When you're right, the bigger your position grows - and when you're wrong, the position naturally shrinks."
Through this methodology, the ambiguity of pinpointing an exact entry or exit point is mitigated, while the duality of mean expansion and reversion positioning means profits can be made in both directions.
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