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Is 5th Time The Charm For Equity Vol?

Tyler Durden's picture




 

While most mainstream market watchers will pontificate wildly on the VIX as indicative of whatever their whimsy of the day tends to be, we prefer to look at relative performance. The forward-looking implied vol is currently only just below its multi-year average premium to realized volatility (so a low VIX is not that exciting standalone). Realized volatility is pretty much as low as it has been in the last four years, courtesy of the Fed - and each time has been followed by a resurgence soon after. However, there is one more indicator of potential over-exuberance that offers some hope for traders - the spread between SPY (S&P 500) implied vol and HYG (high yield debt) implied vol is at its lowest since the crisis - and each of the previous four times this spread has been this narrow, we have seen notable weakness in stocks soon after. With HYG so 'cheap' to stocks, it seems being long HYG vs. short SPY, or long SPY vol vs. short HYG vol makes some sense for some low vol cheap protection.

 

HYG remains significantly dislocated from SPY since the start of the year... is the market pricing for a massive releveraging? Perhaps - but it seems everyone forgets the leverage cuts both ways and with credit managers now more selective, firm WACCs are going to rise and weigh on equity valuations...

 

Equity realized vol has decayed rapidly back to its long-term lows - VIX is 'not cheap' relative to realized vol (lower pane), even if it appears 'low' in absolute terms...

 

But, each time SPY's implied vol has compressed this low relative to HYG's implied vol (remember both very much a risk-on assets) - there has been a decompression in vol AND a drop in equity prices...

 

Charts: Bloomberg

 

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Wed, 02/20/2013 - 14:02 | 3260210 SeverinSlade
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How many days until the treasury runs out of accounting gimmicks and the US officially runs out of cash?

Wed, 02/20/2013 - 14:09 | 3260247 fourchan
fourchan's picture

how does a world wide confidence game that silently steals through devaluation/inflation end?

Wed, 02/20/2013 - 14:16 | 3260284 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

I thought it ended when Bernanke said he was going to buy bonds open ended at what ever quantity he needed to keep the system going.

Wed, 02/20/2013 - 14:19 | 3260307 fourchan
fourchan's picture

well every ending needs a beginning, that might have been it.

Wed, 02/20/2013 - 14:20 | 3260314 fonzannoon
fonzannoon's picture

Funny what other asset sells at 15% premiums while it is crashing in price?

 

Wed, 02/20/2013 - 14:25 | 3260336 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Ones with high demand.

Wed, 02/20/2013 - 14:29 | 3260350 fonzannoon
fonzannoon's picture

I keep driving around my neighborhood and looking to see if the "cash for gold" shops have changed signs to "gold for cash". Not yet. Maybe tonight.

Wed, 02/20/2013 - 14:15 | 3260282 Cognitive Dissonance
Cognitive Dissonance's picture

Congress relented and gave the Treasury unlimited borrowing authority until May 19th if I remember correctly. Obama signed it.

This means that the Treasury is currently making hay while the sun shines.

http://www.cnn.com/2013/01/31/politics/senate-debt-ceiling

Wed, 02/20/2013 - 14:21 | 3260319 SeverinSlade
SeverinSlade's picture

Oh that's right I totally forgot about that.

So we just have the sequester D-Day to look forward to.

Wed, 02/20/2013 - 14:25 | 3260334 Cult_of_Reason
Wed, 02/20/2013 - 14:07 | 3260239 Cognitive Dissonance
Cognitive Dissonance's picture

"I see nothing. I know nothing." - Sgt Schultz

Wed, 02/20/2013 - 14:12 | 3260263 MoneyThangs
MoneyThangs's picture

Interesting article, however markets are extremely oversold after todays bloodbath on wall street, sometimes I just want to jump out the window

Wed, 02/20/2013 - 14:21 | 3260311 NotApplicable
NotApplicable's picture

Oversold??? LOL

We obviously have very different definitions concerning value.

At this point, zero is a far more accurate valuation than any one visible now, once the sunk-cost of malinvestment is factored in along with collapsing demand.

Wed, 02/20/2013 - 14:25 | 3260331 SheepDog-One
SheepDog-One's picture

Has to be 'sarc'....they've ruined the 'markets' and turned them into nothing more than the new SyFy network show 'Robot Combat'. 

Robot Combat League - February 26th at 10/9c on Syfy - YouTube

Wed, 02/20/2013 - 14:23 | 3260328 razorthin
razorthin's picture

/sarc

Wed, 02/20/2013 - 14:57 | 3260496 akarc
akarc's picture

gotta be, or a vision

Wed, 02/20/2013 - 14:15 | 3260286 q99x2
q99x2's picture

The banksters are invinceable. The world is theirs.

What could go wrong?

Wed, 02/20/2013 - 14:26 | 3260338 SheepDog-One
SheepDog-One's picture

When they realize 'they' are the only ones left in the game anymore?

Wed, 02/20/2013 - 14:57 | 3260472 q99x2
q99x2's picture

Once you have an infinite money supply and are both the largest buyer and largest seller and, have the software programmed into all the markets basically that is it. You don't need anyone else to generate GDP. You don't need more than a few people to work. You don't need anything except the military to keep the people of the world from using an alternative system as they die off.

Game over.

The banksters have pulled the other largest wealth managers in with them as they brought the new financial system on line (implementation) starting at the end of 2011.

The next phase is to simply and slowly get rid of any potential competitors that might arise and grind out the public wealth managers and hedge funds.

Slow starvation and death as proved by the Greeks seems to be a business model at this point.

Control over the price of commodities, food, oil, pharmaceuticals (ObamaCare) no big deal.

I guess China and Russia and Japan could be a surprise. Maybe an asteroid or some pandemic but so far so good.

Wed, 02/20/2013 - 14:23 | 3260324 Dr. Engali
Dr. Engali's picture

Volume? Who needs volume when the Bernank has your back. Jump in ,leverage up,and buy near the all time highs...that's what Cramer says and who am I to question Cramer?

Wed, 02/20/2013 - 14:25 | 3260337 fonzannoon
fonzannoon's picture

Doc is it me or does it feel like we are a pin prick away from something major?

Wed, 02/20/2013 - 14:30 | 3260343 Dr. Engali
Dr. Engali's picture

I think we are. The slam down in commodities is telling us something in my opinion. I am very liquid right now at these levels looking for some good opportunities.

 

 

Yahoo cover story right now:

 

As Gold Hits 'Death Cross,' Is It Still a Buy? 

Wed, 02/20/2013 - 14:31 | 3260362 Boston
Boston's picture

If the Fed minutes at 2:00pm disappoint (ie. more talk of pulling back on QE before the year end), then this could become the spark for a leg down. 

Wed, 02/20/2013 - 14:37 | 3260394 fonzannoon
fonzannoon's picture

people are not falling for it. they are buying more metals.  this is just the market breaking up. no way stocks get away from being dragged down.

Wed, 02/20/2013 - 14:45 | 3260435 Dr. Engali
Dr. Engali's picture

Even the Yahoo goobers aren't falling for it, and that is saying something.

Wed, 02/20/2013 - 14:31 | 3260361 spastic_colon
spastic_colon's picture

probably not while the global short ban remains in place.

Wed, 02/20/2013 - 14:29 | 3260351 SheepDog-One
SheepDog-One's picture

Must find.....bigger leverage....need....moar.....ooompfh....

Wed, 02/20/2013 - 14:39 | 3260408 Glass Seagull
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[Fed lets D.Teppah out of his trunk in the basement of NYFed, removes his leather mask, puts him in front of a TV camera to say]

 

"Balls doo dah wohls."

 

[Fed then gives D.Teppah a bologna sandwhich, allows him to mount/bang a stuffed dolphin to climax, and then remasks him before putting him back in the trunk in the NY fed basement for safe keeping]

Wed, 02/20/2013 - 15:06 | 3260501 shuckster
shuckster's picture

I just wanted to butt in and say this about someone who mentioned "unlimited QE" aka $85 billion a month bond buying program ----- 

$85 billion a month bond buying is unlimited only in time scale, however, the Y axis is limited to $85 billion. Once the market finds a way to fully consume that $85 billion, the other inputs you will have are retail investors (via their 401ks). As the new inflows slow to a drip, we will see a drop in new money moving into the market. That $85 billion bond buying will not be able to prop up a $60 trillion market. It has done a good job of elevating prices to their old highs, but that is only because the $85 billion number is somewhere close to the average amount of money that flowed into the market pre-2008. In other words, the 401k money is organic money while the bond buying is artificial. This is an artificial bull market and it will correct when the last drop of organic money falls

Wed, 02/20/2013 - 15:10 | 3260573 shuckster
shuckster's picture

Poignant article TD. This is the stuff that keeps me reading ZH

Wed, 02/20/2013 - 15:14 | 3260611 shuckster
shuckster's picture

Dollar just shot up dramatically

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