The Fruit Shall Lead The Way

Tyler Durden's picture

As Monty Python might have said, apart from AAPL; what has the market done for you today? S&P 500 cash managed (somehow) to cling to a green close while the Dow and Nasdaq ended red. Critically - markets went only one way all day - from upper left to lower right as we go out at the lows of the day - back again at the Draghi cliff edge and just below pre-QE levels. AAPL was a disaster - on heavy volume - as it pushed back down towards it 100DMA (over 3% from its opening highs today!) ending at its lowest in two months with its biggest slide in 5 months (last 14 days). Risk-assets in general tracked closely as while AAPL slide from the open, equity indices manage to hold opening gap gains until Europe closed and then it went pear-shaped. The USD slid all day but didn't 'help' stocks as JPY weakened more (carry offsetting). Treasury yields plunged - 30Y now down 12bps on the week. Commodities all gained on the day - led by Oil (with gold/silver lagging). Meanwhile VIX ignored the debacle, gapping lower at the open and holding down 0.7vols at 15.6% as HYG handily outperformed on low volume.

 

S&P 500 futures - plunge-plunge - linear-tickle...

 

and medium-term...holding at Bernanke's Bottom, at the tip of Draghi's Dagger...

 

The US equity indices post-QE are exhibiting a high-beta unwind (or simply managers realizing that AAPL was way overweight...)

 

Treasuries dipped-and-ripped today...

 

HYG outperformed after a serious plunge late on last night - today seemed more like catch up to NAV (volume was light)... and once again IG was preferred into the close...

 

AAPL - Algos run wild - couldn't get back to VWAP today...

 

and longer-term - we are at the 100DMA and up-trendline... line in the sand time...

 

Risk-assets remained highly correleated all day (right) but into the close the VXX suppression and HYG push failed to ignite strength in SPY (left)...

 

VIX dropped today - in the face of weakness in the equity markets. Why? We are not sure but suspect the divergence between AAPL and the index (as in AAPL is not behaving in line with its recent empirical relationship with the index would suggest) is causing the index vol and implied correlation markets to get FUBAR. As the chart below shows - the relationship between implied correlation (orange - inverted) and the spread between AAPL vol and market vol (black) is very strong. At the same time - as we showed here - intra-index correlations are breaking down as the flow of QEternity seems to be fading and sectors are diverging (healthcare from financials/tech/energy for example). The key is - with AAPL such a large weight in the indices, its implied vol is a major driver of index vol. However, as the chart shows - when AAPL's vol picks up relative to the index (black line rises), so the index vol will underperform (implied correlation will fall) to reflect the expectations of rising idiosyncratic risk NOT systemic problems. However, as the bonus chart below shows - soon after, market vol tends to play catch up - which will then drag implied correlation higher...

 

Charts: Bloomberg and Capital Context

 

Bonus Chart: AAPL Implied Vol Diverging From S&P 500 Implied Vol... the last few times we have seen AAPL vol pull away from market vol, S&P vol has risen rapidly after peaking near current levels... We suspect the current VIX dislocation is due to AAPL vol weights in index correlation trades....