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Intraday VIX Divergence
Once again, the VIX diverges from its underlying: as stocks continue their ramp up on JPY weakness, the VIX is holding its highs of the day (inverted scale). Someone remind us what is it again that the VIX was supposed to indicate?
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No doubt someone is manipulating the market (nothing new really), but to a ridiculous extreme.
When is the last time you saw MSFT down 10% and AMZN down 10% (last week), and nasdaq essentially end the day flat, and dow ends positive?
Maybe people were piling into lesser-known, smaller stocks and out of the bigger names. If risk appetite is growing, this might make some sense, but I really have no idea.
Just ramp up the other heavily weighted components and Wallah!
Into such great names such as... WTFC ! I think junior traders kept seeing the PMs messaging each other this week with "WTFC" and they thought it was a stock play.
A list of names on the move up today is all-quality:
AXL
SCSS
OHB
CNO
LTS
MNI
LEE
Clearly, not all expectations align according to how we might expect they should in our seemingly rational, yet unseasoned at-first-glance models. Not all expectations jib in real time. Don't feel badly. It often works that way in the realm of romantic pursuits as well.
fear, however it might indicate stupidity of the market as well.
as long as the market is being manipulated to the upside there will be few detractors & naysayers.
Check out the 2 recent posts: http://austrianfilter.blogspot.com
...The cheerleading is continuuing.
Hey Tyler, can you get a more detailed chart? The one on that blog is missing most of the data points.
VIX = a metric that had value prior to the U.S government spending (pledging guaranteeing?) $24T to buy 300 s&p points.
Same issue with LIBOR.
good point, lizzy
GS has mastered the formation of bubbles.
HFT creep is their newest method. As long as they exist as HFT participants, the market has a rising floor and the bias will always be up, a little at a time. Logically, down is an impossibility for more than a couple of days, and maybe not even that, unless down is a planned event.
Up is, essentially, a sure thing and will remain so until something structural occurs. By structural, I mean something that would draw THEIR liquidity out of the market as their business sets the daily floor. In essence, this market will have legs for a long long time without regard to any economic fundamentals.
As others have said, once they are forced to remove their floor, look out below. In reality, this might be a year or more from now.
Well. Up and down are both useful. What they are building is the ability to determine inflection points; tops and bottoms. They build a top until the shorts capitulate and buy in. When everyone is bought in, they schedule a top, short themselves, and pull the plug. Ride the wave down. Watch for a natural bottom (perhaps when the suicides start to decline) then turn the machines back on. Go long. Rinse + repeat. So long as they can keep a lid on their secret sauce, they can go on like this for years.
The argument that "speculators will get out" doesn't hold. It would take a generation of epic fails to convince people that the Good Old Days of trading on value and fundamentals are in fact gone. Years from now investors will turn to venture investments (and the long term) by putting real money into real (privately held) ventures, and taking their 5% earnings via dividends and growth. And they'll be happy to have it.
Wall Street always was a casino. Nothing of value to the real economy actually happens there, any gains are temporary, and the house always wins. Until recently "the house" was a distributed entity among many playerz. Now, the house is GS and the FED.
Game over. Find another game. The real economy will thank you for it.
cougar
Very good job cougar_w
the best and most logical comment I have seen in a long while...
I just say Fucksatonny Phil again...Damn Groundhog day AGAIN
uhhhhh. look like someone doesn't know what the VIX measures. The VIX measures the IV of SPX. While loves downward in SPX sometimes coincide with an increase in volatility, it doesn't mean that they should move inversely. If the value of the SPX shot up violently, the VIX should show an increase as well. I believe the reason for the inverted movements is more along the lines that people are afraid of crashes and so are likely to buy volatility (puts) during dips. The VIX and the level of the S&P are just not related. here's some approx VIX math for you..
VIX / sqrt(240) = day's implied volatility
So if the fix is at 32 your IV is going to be ~2. which means that the market expects that ~68% of the time daily movements will be between 0-2% up or down
i meant 252 days.. my B
so yeah VIX / sqrt(252) = +/-(expected range for 68% days)
note the 1stdev 68% connection. i lack the math to know how to phrase this correctly, but i think you know what i mean
u can use 16 as the denominator as an easier number to work with.
Your formula actually gives you the expected Standard Deviation given a volatility..
So if SPX vol is say 26% and its trading 965 then:
(.26/16)x965 = 15.68
15.68 is the standard deviation implied by the volatilty being 26%. So basically if you were to buy the 965 straddle you would need (on average) the underlying to move 15.68 to break even come expiration (assuming u hedge to delta-neutral at every close).
Right now the index is NOT moving that at all so the VIX in fact should be lower (right?!)
BUT-! There is another factor called Skew (or smile for the old timers).
Basically, people will pay more for downside protection than for upside as most players in markets are natural longs. So even if the At The Money vol for the index is 26% the 10% down strikes may be 29%, the 20% down strike 32%, the 50% downside 36% and so forth. In fact when u get to the teeny options u need to put a lot of volatility (since they are low vega options) into them just to get the price to be .05 or .10- and people will generally be happy to give up .05 or .10 for downside protection.
SO. When the index goes down the SPX options slide down the skew so the new At the Money options are now the down strikes of old, so the vol ticks up to that lvl. The VIX does not account for skew, and therefore IN GENERAL any down move in the index will accompany an uptick in VIX and any up move will accompany a downtick in VIX.
This can be misleading to many people because volatility in and of itself has no bias for direction.. 5% down is the same as 5% up as far as the statistic is concerned.
It is the skew that influences this phenomenon.
(Interesting side note: Very few traders used a skew in their pricing models until Black Monday in 1987 and the crash of the European markets that followed. Until then mostly everybody priced all options in a given term at the same implied volatility. After that day many of them got wiped out and the few people who had the skew priced into their models made a killing. Survival of the fittest- evolution in the markets, as now everybody incorporates skew).
fascinating explanation. thank you very much.I would have thought the difference in price would have been settled by arbitrageours using put/call parity....
Interstingly, we are almost at the exact same SPY/SPX level we were at 6 years ago in late July 2003...that time we tested the 98-100/980-1000 area for a bit before busting through to the upside...the market didn't break through the 100/1000 level again for over 5 years, until October 2008.
The VIX measures the implied volatility in options for the S&P 500. The underlying is not the actual index but the options, so when you say it diverges from the underlying, I don't think that is strictly accurate. Despite what everyone seems to believe, the VIX correlation with the S&P 500 is not -1.
On the other hand, I wandered over to the CBOE website and found this:
"Ten years later in 2003, CBOE together with Goldman Sachs, updated the VIX to reflect a new way to measure expected volatility, one that continues to be widely used by financial theorists, risk managers and volatility traders alike."
Hmmm, Goldman again. WTF?
VIX is useless.
There, I said it.
Has anyone seen the volatility in the Yen crosses today? Damn thing is like a wild swing!
Rose-coloured glasses are the order of the day!
I have been watching the same thing. Stocks making new highs while oil and risky ccy are not.
The dude who predicated $20 is a University of Calgary professor. Smart guy but strictly supply and demand analysis (which is mostly correct) but fails to capture the fact that crude has become an asset class and is driven as more by liquidity than fundamental metrics.
Another factor which may be impacting crude today (given no mention by MSM) is China's oil consumption declined by 2.9% in H1/09 (y/y) to 7.7 mmb/d. Chinese crude imports are moving in the inverse direction of consumption. Clearly China is stockpiling crude, partly as a hedge to it's U.S dollar exposure (people smarter than i can comment on the validity of the statement).
The crude consumption number should throw some cold water on the Chinese new car sales number (call me skeptical on about any government created economic number)
as i said someone smarter than me.....
I agree with every one of your statements.
However, i don't think China is playing on a 12-18ms timeline. I think they are playing on a 10 year timeline. Over the next 10 years they are betting on the decline in value of the USD and an increase in value of crude oil.
Just my humble opinion.
And for complete disclosure, over the last 8 weeks (except for that nice 2 week dump we had) fucking dennis kneale has made better market calls than i have.
you are always straightforward lizzy and that is respected.
seeing that you folks are talking oil.....what's going on with our SPR? Does the US keep adding to this? Is it close to "full"? thanks for any thoughts.
about 3 mmb/d short of full.
i believe the doe started buying crude again in jan 2009.
Thank you Lizzy...appreciated!
I would offer one data point to keep in mind when thinking about crude. The Majors do not operate on the basis of short term price vol. Capacity and production, by the nature of the physical side of the business, are not going to change at the same velocity that financials change.
New animal for intraday monitors from CBOE - the implied correlation index - measures expected covariance of stocks by comparing the VIX with the implied vol of the underlying stocks (as measured by the top 50). The historical data shows a few interesting relationships (such as a couple points during the meltdown when the implied correlation was > 1; this is mathematically impossible & implies a negative benefit to diversification). Markets are as rational as returns are normal. Hope the link works if anyone is interested.
(http://www.cboe.com/micro/impliedcorrelation/default.aspx
The only index we need is the SHIT index. All these myriad indices are there for only one reason. MANIPULATE THE PEASANTS.
SHIT index.....hey, you've got something there! Very funny!
CNBC now orchestrating a sell off (classic).
"Is it time to cash out of this rally (boys and girls)?" "If so" CNBC wants "to tell you where you can move YOUR money."
These people are so close to class action law suit it's pitiful, I mean where IS the line...(?)
CNBC dogs have the gall to call themselves "journalist!" I suppose salivating before a teleprompter makes any mutt (in makeup) a journalist.
More like writers and producers acting on morning marching orders...from 'ON HIGH'.
I don't think you are applying VIX properly. Rub some on your chest and up your nose.
what did I tell ya?
short the stock market it's ready for the plunge.
5-year auction went ka-blamo. They're going to have to orchestrate an equities takedown to push the Long Bonds on the 13th.
Regarding 5 year:
"Demand overall was below average, measured by the bid-to-cover ratio of 1.92.
A key proxy for foreign interest, the indirect bidder category, was slightly above the average of auctions over the past year at 36.6 percent but far below the most recent sale."
http://www.reuters.com/article/marketsNews/idUSN2926552620090729
there's no need to orchestrate it
those 'megaphone' tops on all indexes mean that we'll plunge deep and fast now
plus look at extreme MFI level, I'd say that the most reliable indicator for reversals
by 'thier' visibilty of your stop prices, they have trained the mass of day traders to trade with no or very loose stops (tight stops are sought and destroyed).
Be wise, CNBC is in the business of setting up short squeezes. It's thier job!
must watch
Rep Conyers (Dem - Mich) on the Health Care Bill and the importance of reading it before voting on it:
http://www.youtube.com/watch?v=ACbwND52rrw
Seriously what the hell is going on today? Breakdown in oil, the euro and now bonds and the SPX just sits here!!!!!
Thank you for calling Little Timmy's market hotline.
To add liquidity, press 1.
To withdraw liquidity, press 2.
To meet with Chinese officials, press 3.
To reach an operator, press 47 or hold while you are transfered to a Goldman Sachs representative.
empujen numero nueve en espanol
NEW YORK, July 29 (Reuters) - The U.S. Treasury sold $39 billion in five-year debt on Wednesday in an auction that drew relatively poor demand, which may raise worries over the cost of financing the government's burgeoning budget deficit.
http://www.reuters.com/article/bondsNews/idUSNYE00266220090729
Tic-Tic-Tic........
Tyler, your commentary one of my favorite reads these days. But i'm scratching my head on this one. The VIX is diverging from its underlying? Its just a measure of IV which shouldn't correlate very highly with the S&P because it is often higher during market extremes and critical levels in both directions. Its essentially the "cost" of portfolio insurance expressed as a measure of IV. That value can change as the perception of the value of the S&P rises, falls or remains unchanged. Can you clarify what you're trying to say here?
" July 29 (Bloomberg) -- PennyMac Mortgage Investment Trust, which plans to raise $400 million in a stock offering today"
http://www.bloomberg.com/apps/news?pid=20601109&sid=a_Yxhe9P25Bg
shady's back!?!
If the euro crashes it's a max pain trade, because the market in recent months has setup to be long equities, long oil and gold, plus certain other commodities, and short dollars. If the euro blows all those trades are wrong. It could be nasty.
/agree
But technicals suggest a USD reversal above 81 is unlikely. That would require equity crash I think.
Maybe, but I'm looking at the fundamentals.
I see a 20% decline in euro/dollar as the euro banks and economies unravel, further I wouldn't rule out parity. Best of all, few people are set up for it.
I could see that. Alot of ppl would get burned though! I guess it's best to keep an eye on the Euro.
Parity makes sense since similar sized economies, and the BIS wants to bring in a world currency - easier to do if the two largest are at parity.
Euro is down to levels comparable to SPX 935 already but SPX just holds on. Massive dip buying.
Buying of dips, or buying by dips?
I'm at work, but if I recall about 15 mins into "Trader" PTJ is opining on the disconnect between fundamentals and the market about a year before Black Monday.
Tomorrow mornings initial claims data will be interesting. It will be the first week free of the seasonal manipulations caused by auto layoff timing. A high number and the green shoots will be ready for frying.
They won't allow a high number. They can issue a number that is "not too high, but high enough to seem plausible" and then next month issue a correction adjusting upwards to the actual number. Roubini has commented on this practice many times.
Since nobody but the erstwhile shorts WANTS to see a high number, nobody complains about the practice, and thus we happily go a bit further down the rabbit hole each time. What lay in store for us at the end of the tunnel (where lurks 20% real unemployment) is for someone else to worry about, preferrably after the 2012 elections.
cougar
read this from
financialsense yesterday?
http://tinyurl.com/l33jat
VIX is not "supposed to indicate" a damned thing. Nor does it serve much more than its sole intent of creating more profit (preferably on an exclusive and gargantuan basis) for the CBOE. Sat a dinner where Edward Joyce, President and COO of the CBOE, the creator of VIX tried to explain it in 2007. He was no different than the shameless Casino owner (the infamous house) explaining its brilliant "new game" to dupe the gambler (in this case you, the ZH "investor" or navel comtemplator, whichever the case may be here). Being fleeced, yet again, by an industry just trying to sell you shit is not becoming of thee. You really should stick with your noble efforts exposing Wall Street's BS, and skip both the economic forecasting (guessing) by, at least here, confusing for-profit financial products as useful tools for anything other than a way for them to methodically transfer money from your pocket to theirs.
And the sky is not falling, kids. Apparently some posters here may genuinely want a worse life for yourselves, but my guess is the collective whole of humanity does not (for sure, I don't). Yet again, we'll likely all get what we're seeking. As I mentioned elsewhere, so long as this immutable self-interest dominates our DNA, the Wisdom of Crowds (always smarter than each of us, unless of course we own all politics/courts/information/trading like GS is seeking to) will foil your infantile pessimistic stupidity yet again. ZH, give us more wisdom and balls out blowing the top off the status quo, and less bawdy economic/investing pronostication and clueless product confusion, please. Special added benefit, by doing so you'll also likely avoing ego-induced spats like your recent one with the CR blog dude too. Take 'er easy, man (and woman, sorry Marla).
it does not matter what vix is supposed to be - it is what it is.
Besides that - you are a giant pointless windbag!
Ouch Dr, that hurts.
Concur. I was thinking a moment ago about a paragraph from the Desiderata:
"Nurture strength of spirit to shield you in sudden misfortune.
But do not distress yourself with dark imaginings.
Many fears are born of fatigue and loneliness."
The state of the economy (and the world) has begun to weigh on people, I suspect. I feel it too. After a while you start to see things that might not be there. That said, there really are problems and there really are people working the problems to their advantage. Don't know when we can get out of this. Maybe we don't get out. Maybe it's time to let it go, do something else.
I find it therapeutic to start thinking about different ways people might do business sans Wall Street. The apparent profits won't be as great, but we see now that the profits in the past were an illusion. Maybe it's time to find real value, real investments and real ideas and run with those for a while, and leave the casino to the playerz. That, and take a break; constant vigilance in the face of such blatant hippocracy is a drain on the spirit.
cougar
With most of us, it's not so much a wish for collapse - rather, a wish for the truth. Silly as it may seem, I'll gladly forgoe a *large* amount of profit as insurance that the next platform I rebuild upon is real. Considering the founding fathers were willing to forgoe their lives for the same, my stake in the game seems cheap thus far.
This is game is auditably rigged. As a holder of liquid assets, I'm forced to play. I want real information, real referees, and real 'trading' relationships. Until then, let the current F*#$ing ship sink to the bottom of the sea to weed out the big-boys who are destroying the remaining shreds of trust in the system. The 'reset' may hurt, but I'll live to rebuild. Until then this is all a waste of time, where the adage "don't bet against the FED" will probably hold true, until it doesn't... in the nastiest of corrections.
The far more dangerous second-order effect of this game is that these GS-like asswipes are happily labelled "capitalists", by MSNBC/CNN/CNBC and are feeding the fire that enables the current fascist administration to ram their policies up the asses of a dumbfounded and ignorant American populace (my use of the term "fascist" is not name-calling - look it up). Those who engage in the rigging of the game are thieves.
If the wish for reality/honesty is considered 'pessimistic', so be it. The fact that we find the audacity and brashness of the looters amusing and worthy of cynical response implies that we are still awake and thinking. Any other response is probably grounds for professional mental-health counselling...
thanks TD/ZH - i donate.
Mr. Kneal, how did you get an account here!
PS: In all it's gag me with a spoon glory, check this bad boy out (it all starts with transparency, so bring it on):
http://usdebtclock.org/
There's nothing more pathetic than an aging hipster.
You strike me as someone that wants to be thought of as cool and is desperately trying to sound younger than you are.
The structure of your sentences is arrogant, unusual, and perhaps drug induced?
"As I mentioned elsewhere, so long as this immutable self-interest dominates our DNA"
it's not, well at least according to behavior econ/fin, game theory and related research the irrational decisions (due to instincts, negative circumstances, etc) dominate our "DNA".
Don't go there man, lest I be forced to give up my shielded identity with professions and hobbies around the very things you you cite. Go back and dust off your copies of Adam Smith's work (or even Muller's awesome The Mind and The Market) for the cause of these effects, important as they are, that you note. Oh, and from Muller:
"Capitalism is too important and complex a subject to be left to economists."
Word.
Neither Adam Smith nor majority of modern Econ have paid attention to the behavior biases and it might be those biases that make capitalism complex (plus the always evolving society and productive inputs). However if you feel your arrogance makes you right, keep it up - go and play some bridge while your firm is going under. Just don't be surprised that number of fallen smart foolish people and you share a wonderful trait, they always know, absolutely everything!
As of both ZH & CR they share one good quality, both mostly provide data rather than opinions. I am here because ZH is much more daring, but it is his anon visitors rather than ZH that are screaming "doom!". ZH screams BS and while it might or might not turn into doom, he is mostly right - there is too much BS and brown noise out there.
"Early in life I had to choose between honest arrogance and hypocritical humility. I chose honest arrogance and have seen no occasion to change." - Frank Lloyd Wright
Thanks for the compliment, I think. Never played bridge though, and do respect that Gates and Buffett so passionately do.
Re-read Theory of Moral Sentiments and tell me Smith never paid attention to behavior biases. You're killing me, man!
Great point on the anon/doom posters, had not occurred to me and I (seriously) appreciate it.
I think the above poster was commenting on the Bear Sterns idiots who were big into bridge. The point being that the models and functions ascribed to reality are seldom perfect and often overlook six sigma events.
If I recall correctly, they were even at a tournament in Canada while their company ate shit. Hubris abounds.
It wasn't about Gates but the guy who was playing "games" while B.Sterns was going under. Smith could not pay attention to behavior bias because insides on those were not available during his time. And if in his Moral Sentiments he did cover the fact that humans act irrationally even when they have plenty of info, he was farther beyond his time than he is given credit for. There is also a possibility that your interpretation of his vision reflects your knowledge and views beyond Adam Smith vision, not that I anyhow discount him or his genius.
As of choosing between arrogance and hypocrisy, there must be more than two bad choices in our wast universe.
Finally, regarding the our whole argument, it's been a pleasure.
Right on Supertramp! The truth shall set you free.
Out of at least 25 head scratchers, congrats on narrowing down to just 1. And on making it to the end.
OK, the failed T auction and the dollar is up? Huh?
Pretty much a normal market. I guess the problem is no one has any dollars.
Time to print more so the auction gets covered.
http://www.youtube.com/watch?v=5k0ux2w3xMA
Anyone notice the monster swing in 10-years?
Whatever comes out of these gates, we've got a better chance of survival if we work together. Do you understand? If we stay together we survive...
Agreed, however we ve got to remember that there is a huge difference between working together and thinking together. Thinking together spells nothing but trouble in the long run.
The wise man follows the silence.