Volatility

Market observers have long noted that increasing volatility presages market crashes. If you glance at a chart of September-October 1929, just before the crash that started the Great Depression, you will note the same sort of manic swings of euphoria and fear that have characterized the U.S. stock market over the past few months. Not only are the swings increasing in amplitude, the time between each move up or down is decreasing. Think of a series of wind storms that grow increasingly more violent even as the time between storms diminishes.

Just when we thought the most ridiculous thing one could expect from the market was another "all shall be well" rumor from Merkozy (with details pending of course), and the algos naturally falling for it in what is set to be a record low volume session, here comes Italy and shows just how horribly wrong we were. From Bloomberg: "Italian Prime Minister Silvio Berlusconi's Undersecretary Carlo Giovanardi said the government will study if it's feasible to conduct drug tests on stock-exchange traders, with the help of the Milan Bourse and the country's market regulator. Giovanardi, who is in charge of family policy and drug prevention, said that the abuse of drugs including cocaine might explain part of recent stock volatility." And there you have it: cut out the Cocaine abuse by traders and all shall be well in the stock market, and retail will be delighted to flood right back in and throw what little money it has left into the grand global ponzi. We are not quite sure what binary stimulant will be used to explain the HFT-driven volatility - after all, and especially on days like today, about 80% of market volume is purely robotic, but we are confident Carlo will figure something out. And that, ladies and gentlemen, is how you deflect attention from market volatility as a byproduct of being a hooker-addicted pederast who blew up a country's economy.

From the mind that brought you the Great Vega Short comes the next masterpiece on liquidity, volatility, contagion and everything else. "Volatility is change and the world is changing. The truth is that Greece will default. The truth is that if our leaders continue to deny our problems history tells us the US will eventually default. These shocking events will hurt many people, markets will collapse, life savings will be lost, there will be violence, upheaval, and massive political change but you know what? The world will not end. When it is all said and done people will work, they will spend time with their children, they will cry, laugh, and love... life will go on. We will find a way to prosper if we relentlessly search for nothing but the truth, otherwise the truth will find us through volatility."

Simply Must Read report on Volatility.

Looking purely at the Vix one could say it is moving down as fear comes out of the market. Equities are moving higher, Vix moving lower, all is coming back to normal. But if you look behind the Vix it is signaling a completely different picture. What I see is something pulling back before a final assault and highly probable defeat of the 48.00 line in the sand. I see the Vix moving up to the 60 range in a matter of days. Perhaps that will lead to the final push lower in equities before some form of a tradable bottom is put in. Perhaps it is already in but judging by the divergence between volatility and the SPX I highly doubt it. There are three charts I want to share with you below, all of which have commentary on them so please click and read what is written. As a refresher below are the various terms used on the charts.

Of course freedom - as envisioned by the Founding Fathers - and free markets would go a long way towards allowing normal volatility, and thus preventing Black Swan collapses ... but the Chairistan and Thought Police can't have that, now can they?

Time to sell some vol? (for the brave ones)

Yo, It's rough out there...

Volatility and mispriced risk for years to haunt investors after S&P Downgrade 

The rational and efficient market mythbusters at Nanex have made another major discovery, having gone through the SEC's proposed plan to deal with extraordinary market conditions, better known as Limit Up/Limit Down Plan to Address Extraordinary Market Volatility, brilliantly abbreviated to LULD, and find that even if said been had been in place before May 6, 2010 it would have done absolutely nothing to prevent the 1000 swing in the Dow. Cutting through the chase, and partially explaining once again why there has been over $150 billion in domestic equity mutual fund outflows since the beginning of 2010, is that "The SEC has proposed many band-aid fixes since May 6, 2010 in an effort to make investors feel confident again about the equity market. The sad truth though is that none of their proposals so far will prevent another flash crash. Worse, some proposals, such as this one, will likely make things even worse." Bottom line: investors have no confidence that this market is at all better, and in fact it is very likely that the market could crash just as violently as May 6, at any given moment, as the SEC has done nothing to fix the underlying problems, but merely redirect and pretend that it is on top of things, while taking a nip and a tuck at some of the easily remedied symptoms. And as long as this mutually acceptable delusion continues, stocks are in constant danger of another epic wipe out courtesy of the SEC, which will eliminate what little confidence there is, even among those who trade purely with "Other People's Money." We thank Nanex for their ongoing pursuit of the truth behind the SEC's endless lies. Because if the regulator itself is corrupt and incompetent, then there really is no hope for market efficiency and fairness.

The one characteristic that most investors fail to understand, by far, are the reasons behind the periodic volatility that afflicts gold and silver every year. Understand the deliberate banker price suppression schemes executed against mining stocks, and a completely different take on the asset class of mining stocks will emerge. You may just startlingly conclude that the “best in class” mining stocks are grossly undervalued and a great buy this summer season.

While it didn't lower ES margins just like before the S&P rout started several weeks ago, the CME has just decided to lower margins across virtually all interest rate products. Again. This is the second consecutive margin drop in under 3 weeks, following an identical action on June 3 when the CME slashed IR margins initially. Some examples: TEN maintenance and initial margins are down from $2160 and $1700 to $1485 and $1100 respectively, or over 30% each in under weeks, 17 (the 30 Year UST Bond Futures) maintenance and initial margins are down 3713 and 2750 to 2700 and 2000 respectively, another 30% drop, and so on. Most amusingly is attempting to validate this margin cut when looking at the Treasury complex vol expressed by the MOVE index. Oddly enough from 71.50 at the beginning of June, or a 2011 low, vol since surged to nearly 2011 highs, or a roughly 20% jump. Yet it is precisely this jump in volatility that somehow is conducive to not one but two margin cuts in three weeks. Luckily, the end of QE3 in precisely 10 days has nothing to do with this decision which makes investing in Treasurys by speculators so much more easy...

And following the overnight set of news which confirms our January assumption that the keyword of 2011 will be "stagflation" the entire commodity complex once again slides. It is unclear if the move is predicated more by fears of inflation or of economic contraction. After hitting almost $40 overnight, Silver has once again taken the daily tumble back to the sub $37 level. The catalyst today is crude, following the DOE announcement that crude inventories surged to 3,871K barrels on expectations of 1,500K, and Cushing inventory hitting 1,124K compared to 102K previously. WTI slides to sub $101, even with the latest series of margin hikes which purportedly is supposed to mitigate volatility. So much for that.

From Goldman: "US industrial production increased by 0.8% mom in March, up from a revised 0.1% increase previously. In February, unseasonably warm temperature reduced heating demand and therefore output of utilities. This held back the gain in overall production despite growth elsewhere. This effect reversed in March, leading to strong growth in the index." So between snow, rain, heat, earthquakes, nuclear explosions, oil spills, all of which are of course completely unforeseeable, why do we need economists making "forecasts" again?