We noted earlier the "noise" in VIX. We are starting to get a picture of what's happening... and it's not good. As Bloomberg reports, Group One Trading’s Dominic Salvino warns, inputs to the calculation are going skewy on the VIX in the past couple days because "safety parameters are set to hair triggers" and market makers are going wide more often than not. Yet another market - and The Fed's direct manipulation tool - is now entirely broken.
Yesterday - amid multiple options-based exchange "breakages", the VIX feed across various platforms appeared massively noisy. We assumed it would be cleaned up and brushed under the carpet in the new normal. Today, it is just as bad...it appears the plunge in stocks has been a catalyst for amplification of VIX pricing noise... so far no desks (or CBOE) have a reason for this.
One of our old rules of trading is that whenever a major asset class, index, or other benchmark has a sudden, rapid move in price, something blows up. Sky high. That’s because people get used to regimes. They get used to a certain state of affairs with a lack of volatility. They become complacent. Maybe they stop hedging. Maybe they allow themselves to have unbounded downside risk. Maybe they start gambling. So what's going to blow up?
- Fall of the Bond King: How Gross Lost Empire as Pimco Cracked (BBG)
- Hong Kong 'Occupy' leaders surrender as pro-democracy protests appear to wither (Reuters)
- Ashton Carter, Ex-Pentagon No. 2, Emerges as Obama Favorite for Defense Secretary (WSJ)
- Oil, the Ruble and Putin Are All Headed for 63. A Russian Joke -- for the Moment (BBG)
- New U.S. oil and gas well November permits tumble nearly 40 percent (Reuters)
- Swedish government on brink of collapse (AJ)
- China says Britain has no moral responsibility for Hong Kong (Reuters)
- Indian Labs Deleted Test Results for U.S. Drugs, Documents Show (BBG)
Following the October swoon, stocks have vaulted to all-time highs. As we discussed previously in "Sentiment Is Off The Charts Bullish," there have only been few occasions where investors have felt so "giddy" about the financial markets. Such periods of exuberance have never ended well for investors as they were deluded by near-term "greed" which blinded them to the building risks. One of the things that we pay attention to is the ratio of the S&P 500 compared to longer duration bonds.
- Banks to Pay $3.3 Billion in FX-Manipulation Probe (BBG)
- Symbolic being the key word: U.S., China sign symbolic emissions plan, play down rivalry (Reuters)
- Europe (so really Russian sanctions) is the new "snow in the winter" - Carney Sees Europe Stagnation Impact as Growth Outlook Cut (BBG)
- Eurozone Industrial Output Points to Weak Third Quarter Growth (WSJ)
- Not everyone around Abe is insane: Kuroda Ally Flags Warning on Delaying Sales-Tax Increase (BBG)
- Hong Kong to scrap daily yuan conversion limit to boost stock investment (Reuters)
- Barclays Falls After FX Settlement Delay Reduces Discount (BBG)
- Some unhappy Yahoo investors asking AOL for rescue (Reuters)
"What I’m describing here is a sea change in investor attitudes that has profound implications for the rest of the market. What you do with that information is up to you."
It appears the excitment of US midterm election sparked a "sell-everything-American" strategy today as stocks, bonds, WTI crude, the dollar, Treasuries, and credit all sold off to a lesser or greater amount. Trannies started off liking weak oil prices but faded as WTI could not bounce off multi-year lows but stocks were jolted lower (before v-shape recovering to VWAP) by Mutiny at the ECB (and desk chatter that - as we have warned - QE is not coming). The decouplings continue as high yield presses to 2-week lows and Nikkei futures diverge from USDJPY. The dollar weakened back to unch on the week after Draghi but commodities saw no gains from that as gold, silver, and copper slipped. WTI dropped to as low as $75.85 at 3-year lows. VIX - helped by numeous CBOE 'breaks' today - jerked back below 15 (after trading above 16 briefly).
Because when you have no POMO, and no QE on the horizon, you can always break a stock exchange and send the entire market... higher!?
Congress gave the Fed a mandate to “promote maximum employment, production, and price stability”; it never explicitly authorized propping up stocks. Yet through a remarkable theoretical stretch called the “wealth effect,” that’s exactly what the Fed is doing.
some such as JPM, are already rushing to the defense of their clients (i.e., the people to whom JPM's prop desk may have some selling left to do) by providing a handy backtest of which key technical indicators proved useful in the past when determining market bottoms (if not tops - that one JPM will probably never, ever disclose), and what these are saying at this moment. So for all those who need convincing that the "bottom is now in", and are desperate to BTFD because other, greater fools will also BTFD and so on, here it is, straight from Jamie Dimon's mouth.
This past week investors took a blow from a sharp selloff in the financial markets. Now that the correction has occurred, at least to some degree, the question that must be answered is simply: “Is it over?” That is the basis of this weekend’s reading list which is a compilation of reads that debate this point. The bulls remain wildly bullish, believing that this is simply a “dip” in the ongoing “bull market.” The more pessimistic crowd sees the opposite.
There is this whole idea of state dependence that we have to consider when we’re talking about the market. Uou might have a plan to buy stocks when the index gets below a certain level, but when the market gets to that point, you: a) may not have the capital; and b) might be panicking into your shorts. It’s nice to have a plan, but, paraphrasing Mike Tyson, everyone has a plan until they get punched in the face. It’s been so long since we’ve had a correction, I’m guessing that most people have forgotten what a correction feels like.