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The Market Has Never Been More Fearful Of An Extreme Event
"There's something going on in derivatives land," is the warning from ADM's Andy Ash and as Paul Mylchreest notes the relationship between VIX and SKEW suggests the options market is pricing in the possibility of a major market event. The process enables professionals to maintain the illusion of calmness in VIX while hedging their positions (as they attempt to unwind as we have shown). Whether this 'event' is a crash or melt-up is historically unclear but given the taper and the trend of the last few years, we suspect the former more likely that the latter.
Via ADM Investor Services' Paul Mylchreest,
A rather thought-provoking chart which we've been looking at is the ratio of the SKEW (the chance of an extreme or outlier event, i.e. OTM versus ATM options) versus the VIX (the expectations for more 'normal' day-to-day volatility - the price of hedging implied by ATM options)... and is an indicator of how the market is pricing the possibility of a potential black swan event.
You can see how extended we are right now… (actually at record highs)
We can’t help wondering when Bill Gross tells the world that he is selling volatility, whether he is, in fact, selling ATM vol and buying OTM vol ???
While (curiously) 2000 didn’t register, the two previous highs in the SKEW/VIX ratio were 1994 and 2007 which turned out to be pivotal dates in terms of changes in market direction.
One up and one down... Which does it look like this time?
* * *
Think briefly about who is buying and who is selling? Thiunk about who is buying deep OTM protection? Smells like the professionals are a little less sanguine than their chatter suggests...
Institutional clients are dumping equities off to retail clients... thank you very much...
and those that can't dump their assets are hedging aggressively (while maintaining the illusion with VIX that all is well)
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The FED is either going to win or lose. I will hedge on the win and bet on the loss.
"The process enables professionals to maintain the illusion of calmness in VIX while hedging their positions"
Talk about taking bullshiting to a new level ...
this market guy really has a nose for news, no need for inside information any more .... just trust the market guy... BS to a new level
For those not in the club (who are already on the lear jets going back into their gated communities in Montana or private islands);
"Don't try and interpret or predict this market, that's impossible. Simply try to recognize the truth, there is no market for true price discovery"
If the market is pricing in a black swan event, by definition that is not a black swan event.
pods
Yes, the "unforeseen" event will only become clear after the fact (when two of those lines "recouple"- if ever).
It doesn't get more extreme than this:
The BIGGEST Coverup in USA History
Just like the Holliwood bear, hidding under the trees, this commet planet of yours will hide from the sattelites follow you until it kills you
Planet X is the Derivatives Death Star. And hey, what's that coming up over the horizon? RUN FOR THE HILLS!!!!!!!!!
There's also this:
Comet-Planet Identified, Orbital Trajectory Verified by Renowned Astronomer
Carlos Muñoz Ferrada:Single Most Important Video on the Internet
^^^
An undetectable, hyper-dimensional comet-planet that is six times larger than Jupiter is coming to kill us all!!!! C'mon, dude.
Knock knock.
"Who's there?"
"Candygram."
The sun most likely has a small brown dwarf companion star orbiting unseen. Almost all stars are part of a binary system. However it would never enter the inner solar system. It could however come close enough on an elliptical orbit to cause material in the Oort cloud to dislodge and head inwards towards the sun.
New comets would enter, essentially a comet storm. The outer planets would take care of most of them, perhaps becoming new moons if enough material is available and condenses around an orbit. Perhaps a few would make it to the inner planets, maybe hitting the Earth. Could be the cataclysm that turned Mars into a dead planet.
This is the plausible scenario, if it exists. The companion star would remain billions of miles away and never be seen. Only its gravity would be detectable. Even so we would probably never detect it due to the cycle unfolding over millions of years, the deviation from the baseline would be too small to detect over a few decades.
The point is if a dwarf star does exist, there is nothing we can do about it and there isn't any way of knowing if it would cause a catastrophe. The polar shifts have nothing to do with Planet X but a natural effect of the Earth's rotation and core. The polar reversals happen mutch shorter intervals than the supposed effects of the eliptical orbit of a companion star. Polar reversals have been proven, the companion star is still a fringe theory.
Pods, there are no black swans. Central banks, isda, shadow buyers (Belgium), several PPT's are watching markets closely. Everything is papered over, until the larger public throws in the Spiderman towel.
ditto ... Jim Rickards says if you can see an event coming, that is not "the" event that will take out the market. Events that you can see can always be dealt with or manipulated into some illusion of submission.
A White Swan that needs a bath?
I call these brown swans.
Please, a Lear jet is so 1%. Join the .01% and treat yourself to a Gulfstream G650ER (http://www.gulfstream.com/products/g650er/).
yeah, well some of those .01%'ers just might not be as safe in their luxury Gulfstream jets as they think they are.
This guy got wacked harder than a banker with a loaded nail gun!
http://www.dailymail.co.uk/news/article-2646565/Charred-wreckage-private-jet-claimed-lives-billionaire-Lewis-Katz-six-revealed-emerges-pilots-didnt-time-issue-call-help.html
Kinda similar to the way Hastings was taken out, don't ya think?
http://www.dailymail.co.uk/news/article-2344232/Renowned-reporter-Michael-Hastings-33-dies-tragic-crash-finding-fame-bringing-Stanley-McChrystal-touching-account-losing-early-love-Iraq.html
You're referencing the Daily Mail. Your argument is invalid.
Travolta has a 707: https://www.youtube.com/watch?v=5vHkTxavNNs
I think it even has a dance floor and disco ball!
And, unlike Hastings and Katz, he's stayin' alive.
Never underestimate the power of magnetic trees.
Paraguay
Obama Impeachment Very Possible After Midterms
Breaking news - ZHer-r-r-rs still run of the mill GOPTEAs.
Only if his life insurance policy, Joe Biden, goes first!
"But what's really going to bake your noodle is, if I hadn't told you to watch out for the dropping price of silver when you bought some, would it still have dropped?
Have a cookie, you'll feel right as rain"
The smart money is selling and the dumb money is buying. We must be near a top.
There will either be inflation or deflation. Unless, of course, prices stay the same.
What we are seeing is all smoke and mirrors. The whole thing is rigged, and you and I don't have a clue. Meanwhile, distractions abound, and anyone with a clear mind knows this entire edifice is going to implode any moment.
Good luck in the casino on Wall Street.
Craig
Any formula based upon the assumption that inflation will be the bail out is inherently flawed.
The goal of QE was to create inflation or "stimulus"...yet as soon as even a whiff of inflation appeared (just last year) the Fed announced the end of QE. So for sure...the USA got hit with a huge inflation last year...but simultaneously prices for raw materials collapsed.
The dollar moonshot...the economy has contracted...and the "theory" is that "if only we had stayed the course." The fact of the matter is the Fed is now unwinding QE...and as it does so the train wreck of the American economy is revealing itself.
I want to sell out of that treasury position but I just can't bring myself to because it so plainly fits the data. Namely "recession with a massive over extension of credit." In short inflation leading to default leading to a price collapse.
In debt.
I think where the real leverage problem is "from within the Bank" is in the basis trading. The Bank is trying to widen the spread in order to "create" growth (liquidity to be used to buy back stocks, buy Alstom, take Coke private!)...but this is generating huge profits for Wall Street but with no recovery in sight putting a veritable potpourri of financial instruments and even entire Government Agencies "in the wood chipper."
"Just in time for World War III" it would appear.
This is all subterfuge. The Market needs to realize they have one more year of DOW, S&P, and RUssell to infinity.
August 2015, when the debt ceiling stuff comes up again, is when the *real* fun begins (bondzilla)
Agree
Is that when the Fed finally "untapers"? I simply don't see it. The energy producers really seem to be forcing the central bank's hand here. I simply see a slow but steady decline the global standard of living from here on out (barring the application of function fusion reactors to power cities of course).
What proof is there that the privately held federal reserve is really tapering? Oh! They told us they were.
Tuco
bondzilla is a myth
Please. How many debt ceiling 'crisis' have we seen over the past few years? The next one will pass without incident as well.
Get In There, Mortimer, and Buy!
the only "extreme event" that can take down the market is actual growth. anything else will be greeted by btfd.
We are on a permanently high plateau. Growth would be celebrated by BTFATH. Take the blue pill Fonz. The steak is juicy and delicious.
I'm with you. I am all about the world cup and enjoying the tranquil markets. What could go wrong?
I can't recall any extreme events in the recent past, so I think we're good to go.
Does anyone know what time the market opens today?
The market is closed today and tomorrow. Yes we have no bananas.
Not in your lifetime bro.
We have markets?
I know there's prices, I know they're pushed by central banks & their minions, but markets?
I didn't think we had any of those left.
Odd, that's not what the VIX is saying...
Read the post again. VIX is more applicable to 'normal' day-to-day vol and hedging... SKEW (or OTM vs ATM vol) indicates 'fear' of considerably larger moves (and signals how far away from B-S normality options markets expect events top unfold)... so VIX can stay low as fear rises in the extreme snowing the standard investor who relies on VIX for his fear (or complacency) indication. Of course, there is a limit to the steepness of the vol skew before it bleeds into the ATMs (and thus VIX) but we are not there yet.
Thanks captain obvious. (FYI, it's called sarcasm)
LMAO - sorry mate.
And if people start paying too much attention to SKEW, it'll just have to be managed like they do the VIX, by manipulating the inputs until the output looks good.
The sheer statement of this insures that nothing will happen to the market... If everyone believes it, it cannot happen. So says the behaviorists.
Reminds me of Goodfellas when Joe Pesci tells Ray Liotta "evertything is beautiful - you worry too much."
This is just before Tommy tells Henry that he is being "made" or becomes a made man in the Mafia. Seems Tommy should have worried more.
https://www.youtube.com/watch?v=LlQCW02Tbxc
Ya, mid-July the S [will] HTF. Until then BTFATH.
the second chart looks a little like the United States
FL looks institutional.
Institutional clients are dumping equities off to retail clients...
Excuse me but it looks from here like they are ALL SELLING. Since retail is not a net buyer the market can never go down. It's simple really.
But...but...if institutional clients are selling, and retail clients are selling, who's buying? Oh, right, I forgot about the world's central banks. Thank goodness! Without them, we never would have arrived at this state of permanent stability.
In London, the extreme action in Equity Derivatives is the flurry of redundancy notices. The foot soldiers are being culled - no need for pricing of risk anymore abviously. Order flow is virtually non existant. Not asking for or offering sympathy, but right now a chair at an Equity Derivative desk is not where you want to be sat.
Veeery interesting. VIX is a measure of actual stock movements so maybe it doesn't have to be separately controlled, but options pricing has separate sentiments involved and the Fed has not seen fit to try to control the options contracts. Hohoho. Should be able to reverse-out an implied volatility, or a curve of implied volatilities given different rate scenarios.
http://www.testosteronepit.com/home/2014/6/23/imf-frets-about-giant-sucking-sound-of-hot-money-wants-to-ta.html
well done. nearly flawless. funny because earlier today charles hugh-smith worried aloud about inflationary blowback if the fed continues on the current path. that worry is of course ridiculous when one considers the yawning abyss on the opposite side. the fed can never quit buying, ever, and the whole world knows it, especially the imf.
They can take this market as high as they want it to go.
Unless the Federal Reserve communicated directy to the banks and on paper that their holding stocks for years there will be that uncertainy and fear.
that retail/institution/hedge fund graph keeps showing up
i count about 8 times that I've seen it in a ZH article - Dec 13 revision - time for an update folks.
it's source is BOAML - so that means the opposite applies/do the opposite
Agree, hedge funds missed this rally in 2013 as has been pointed out ad nauseam here. They are shorting this all year so far and getting nailed on it. The FED keep pumping it up and accomodative policy keeps them covering. Might be an illusion but if the smart ones are being fooled what chance does ZH reader Joe6Pack have.
edit: this is a measure that they made up, skew ÷ vix
skew has been at this level before this year (before the NQ got slammed in the spring). VIX has fallen and that is why this measure has moved up. SKEW is only around since 2012 or so.
http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=XX%3ASKE...
"These initial results tell me that the absolute level of skew does not tell me much about the returns on the S&P 500 on the following periods of time across different time intervals".
http://seekingalpha.com/instablog/462226-surly-trader/40367-option-skew-...
Is this a replacement "canary in the coalmine" since the "NYSQ margin at all time highs" one has not crashed the market?
"Whether this 'event' is a crash or melt-up is historically unclear..."
This is not an "either or" deal.....appears obvious that there will be a crash quickly followed by a melt up so as to maximize Goldman's gains.
Chart A is a pump and dump pure and simple.
If there is an "extreme event", how will it affect the average American? What are the possibilities and probabilities? How many of you/us are stocking up? I know many cannot but are Americans, who can, stocking up?
Bamafones, toasterovens with iPod docks, all the sentshells. All set for D Opocalypse!
not sure i buy this one.
Maybe for a dollar.
YAY! Finally, after a hundred years of getting their asses kicked and being bag-holders for the pros, retailers are FINALLY on the right side of the trade!
And not a minute too soon!
So tempted to try market timing.. My guess is we should be safe at least until current upcoming elections
Funny but all the ETF's AND ETN's are all in the red for the day by about 3% yet the true VIX is up 3% WTF?
If we ever DO start to see actual economic growth, these guys aren't going to know what it is. They may well panic.
"OH my God! I have to sell NOW! Look at those numbers...they're liquidating EVERYTHING! They must be in big trouble!"
"Relax...relax. I've been through these things before, way before your time. Those numbers? They're sales, Pete. They're sales..."
"Sales? What the hell is THAT?" Looking at the figures once more in disbelief, he puts his head in his hands and begins to sob uncontrollably. "It's over...it's all over. I'm ruined..."
"No, no, no...Sales are a good thing, Pete. It means they're finally finding buyers for those Sole Phones, those sneakers with cell phones in the bottoms...And the ad campaign, "Walk Around With Your Phone On Your Feet!" went viral. Well, now they're actually selling some..."
"But then they'll have less! The warehouses will be emptied if this keeps up!"
"They'll make more, Pete, they'll make more."
Pete shakes his head in disgust. "I just can't figure this market out Bob. Nothing makes sense anymore."
Hey 'lil Fellers
Did it ever occur to you that the outsourcing of computers and services by the U. S. Government might result in rouge feeds out of the NSA monitoring databases, that investors, houses, hedge funds are being listened to and screened for inside information, coupled with the actors' dirty little secrets, or that authorized individual are doing unauthorized filtered data grabs of trading and decision making content? They could do all that under the cover of the "wor on terr". There is at least one nation that receives a "direct" unfiltered feed of all NSA data.
Oh, this must be paranoid. Why would anybody be tempted to gather inside information to make sure bets to make millions. One could never suspect it could happen by those who are in the position to know exactly how to avoid detection.
Playbook!
People can be skeptical all they want, but there is something going on since last Wednesday. The futures seem like they're being propped, but without any follow-through buying. Sellers need to hit critical mass and get this bitch market heading south. Absolutely no volume either.
How many times do you hit post when you've rediscovered your longing for change?
Can you say "incoming jihadist clusterfuck"... Well, the wine is nice and the weather is clement.
I think i will book a week in my hotspot for decleansing - i.e. total forget the world hedonism, might as well, I've not broken anything in a couple of years :P
*I must drink lots of milk
Then when i get back.. i will move into downsized accomodation, save up a big fat reefer and give myself spiritual blowbacks
Then if someone lights this fire i can go chill somewhere hot, but not too hot and fuck gorgeous women, sail on the backs of turtles and grow a big plot of fuck all y'all shrooms :)
Thats the hedged plan.. obviously... plan A will be watch london turn into whore city and reap some profit/rewards
Now where is that hunger games hottie when you need her................
Lambs. Meet Slaughter.
Same thing, again and again.
What are the counter party risks with derivatives, again? What is the unwind process in a panic situation...say lack of liquidity?
All they are waiting for is to pick out who will be left paying. Any guesses? Your assets are mere shadows...sucker!
This is the global equity markets.
The vultures are retail and hedge funds...Smart money is sitting in the bus taking pictures.
The divergence of the retail and institutional graphs is all you need to know, to know what's coming next imo-- a crash.
But my crystal timing ball isn't any better than anyone elses. But I'd say sooner rather than later.
I agreed ugliness lies ahead. I love the way it is always being kicked out a year or two and never going to happen tomorrow. It is as if we can't handle what is coming at us and need more time.
For a long time I have been trying to develop a scenario for a market "super crash" and a reasonable map that would arrive at such a situation. Below is an article looking at how it could happen sooner rather than later.
http://brucewilds.blogspot.com/2013/01/flash-crash-on-steroids.html
So retail, instituitional and hedge funds are all selling and the market is hitting new highs?
Either that second chart is complete bullshit or there is a fourth participant (i.e. central banks) missing from that chart.
If they are a missing participant on that second chart, then that basically suggests the dynamic of the market has changed and the first chart is also not an accurate reflection of relativity.
Think about it... if a central bank is investing in a more risky asset, they are going to hedge their exposure. Equity prices rise, derivative prices and issuance in absolute terms rise.
Don't you think the biggest central bank experiement in history in conjunction with sustained period of low/negative interest rates and aneamic growth will have some implications not seen in previous years!???
Where's the $29.1 FED buying overlay?
A geopolitical event can change everything. Everyone can see that ISIS could soon become the Caliphate, and send oil north of $300
The more and more I study derivatives it now appears the main goal of QE may have been to hold up the underlying value of assets that feed into and support the massive derivative market more than help the economy.
QE has up to now stopped an implosion of derivatives and the resulting contagion and shock that would have spread throughout the financial system. In postponing this collapse the Fed has created a whole slew of new problems. More on this subject in the article below.
http://brucewilds.blogspot.com/2014/03/derivatives-house-of-cards.html
Fundamentally, yes. Short term I think the (equities) melt-up is about to enter a new leg upwards. I'm not sure this is what The Janet wanted, but it's what she's got.
Look, an extreme event has HAPPENED ALREADY!!! Airline ticket prices have DOUBLED in the last three weeks or so!!!!!!!!!!
I posted about this recently (since I price tickets a lot), and ZH has an article about it today. Okay, I know it's not a "markety" thing, but if it is not some temporary blip, it is huge!!!! And it's been like this for over three weeks, so it already isn't temporary!!!!
Over at the ZH article on the topic, posters are just typing in the usual stuff re how much they hate the TSA, how they drive everywhere now, blah blah blah. Come on, WHY HAS THIS HAPPENED??? Will someone write about this, and explain it to me???? I think this is very important, but is getting no attention.
You can see sentiment of primary dealers of the FED ( banks) in this chart:
http://www.finecharts.com/charts/967-ewg_and_sentiment_of_banks.htm
It is derived from daily open market operations of the FED.