A "1 In 10,000 Year Event": JPM Head Quant Explains Why The S&P Refuses To Sell Off

Tyler Durden's picture

Ever since Brexit, traders - and mostly bears - have been scratching their heads over not only by the S&P500's tremendous rally but also but the market's seeming ability to immediately digest through any incremental negative news, both economic and geopolitical and rebound immediately from a support level at around 2,150. And while there has been speculation of central bank intervention to prop up the S&P any time it approaches this key level (something which several years ago would be considered ridiculous but now is all too possible), it turns out there is another - perhaps even more unexpected - reason why the market remains "pinned" in its historic trading range of 2,150 to 2,180.

Here it the explanation from JPM's head quant, Marko Kolanovic.

Lets look at the recent collapse in US equity realized volatility (realized volatility over ~3 weeks of only 4.5%). Over the past 14 trading days, the market did not move more than ~50bps on any given day, and on 8 days it moved ~10bps only. Figure below shows S&P 500 making “Uturns” and virtually staying unchanged most of the days since July 14.



Naively assuming a normal distribution of returns, one would expect this scenario to happen once every ~10,000 years. The fact that we see this type of behavior demonstrates market inefficiency—in this case driven by hedging of option exposure. Quite literally, the market was pinned. Over the past 3 weeks, the amount of call options exceeding put options (in terms of gamma exposure) averaged almost $40bn (per 1%), which is the largest call to put gamma imbalance ever observed.


In addition to a very large amount of S&P 500 index and ETF call options struck at ~2150 level, we want to point to an unusual call ratio trade (1 by 3) in which an investor sold call options on S&P 500 futures with strikes in ~2175 range. This added about ~$10bn of gamma and helped create a “dead zone” from 2150 to 2180 in which option hedging creates a drag on any S&P 500 moves.

Kolanovic' conclusion:

As this collapse in realized volatility is not a fundamental change in volatility regime, we expect realized volatility to increase (this increase in market volatility is shaping to be a consensus view, as indicated by steep contango of VIX futures). Option exposures that are pressuring volatility should roll-off, and investors should increase leverage and set protection closer to the current market level. This will set the stage for a more rapid increase in volatility. We have seen these switches between extreme low and high volatility that manifest themselves as high volatility of volatility (e.g., note that that the current “once in 10,000 year” market calmness came after a Brexit day move that was “a once in 50,000 year” move for EuroStoxx 50 index).

Whether central banks will respond with even more of the same to this upcoming "increase in volatility", remains to be seen. Looking at today's market action, with 2,150 in the cash index suddenly in jeopardy, we may get the answer very soon.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
American Psycho's picture

Translation = keep stacking your physical boys and girls

CounterPartyVice's picture

Let me explain that to you: We use printed money to prop up the casino that pays us our bonuses. Do you get it now?

mikla's picture

Such a "1-in-10,000-year-event" statement is absurd on its face, where the speaker illustrates ignorance of math and logic.

It's fraud.  Simple.

nibiru's picture

When everyone is doing that - then everyone is happy to continue making money within the rigged system. 


At the end of the day fundamentals return - but will we call it then a '1-in-250,000-year-event'?


Charles Wilson's picture

"Markets don't work!  Markets don't work!

(So, my friends and I need to make decisions for the market...For a small fee...)"

nibiru's picture

hey on the upside look at the GDXJ! Still last 6 months makes me smile

NoDebt's picture

And the wind whispers "A permanently high plateau...."

SamAdams's picture

Why didn't they just say, "The last time this happened was 8016 BC".... 

NoDebt's picture

When you say it like that it sounds way worse than "since Lehman".

SoilMyselfRotten's picture

Marko is a must read every time he releases an article, few have been more prescient

thesonandheir's picture

To be honest I haven't the foggiest idea what he's on about and I don't think he has either.

If he came out and said the markets are being propped up by certain central banks to purvey the illusion that the US economy is fine then I'd have agreed

The Merovingian's picture

To a vacuum tube, that headline reads like a once in a lifetime buying opportunity ...

JamesBond's picture

I'll take the Neolilthic Period over this shit anyday.



BuddyEffed's picture

Seems like once in a blue moon events, once in a lifetime, one in a million, once in a while, etc,  are becoming certainties now.

They'll put forth rationale and explanations to attempt to soothe and smooth away and rationalize things, claiming how we hit a key hole, or were unlucky, or whatever.  Yet, many of things will happen again just a few short weeks or months later. 

johngaltfla's picture

Interesting. August call options expire as the Olympics end and mirroring last year's two weeks of major instability in markets.

Toss in some bonds crapping out, a DoucheBank problem in Germany and life could get very interesting once again.

Here2Go's picture
Here2Go (not verified) NoDebt Aug 2, 2016 2:44 PM

"The last time this happened was 8016 BC"


Wasn't that around the time Noah was building an ark?

Countrybunkererd's picture

The Old Testament discusses the collapse of money (money became worthless) at about that same timeframe.  Seriously.

Just sayin'...

mtl4's picture

Interesting how a one in 10,000 year event coincides with the loewst interest rates in 5,000 years.......must be pure coincidence.

nibiru's picture

You Sir, should stop spreading conspiracy theories! Our beloved leaders know what they are doing /s

Antifaschistische's picture

just imagine that.....the market being "pinned" during the DNC....WOW, I NEVER would have ThOuGHT!!

walstudio's picture

For the sake of accurancy, 10000 years back was not 8016 BC, it was 7984 BC. Here is the math in case you are puzzling: 2016-(-7984) = 10000

nibiru's picture

<this is when everyone checks their diapers with 'is it now?' question in their heads>

Oldwood's picture

They can make money when the markets move up or down, but not when they go dead still. I hear them say the markets do not like uncertainty, yet they also say the markets trade on the future rather than today. The future, my friends is unknowable in the real world, but in this artificially aspirated one, the future has already been written and therefor no longer exists, The future is dead, They know the play. There is no uncertainty to drive the markets and there is only one way it can go in reality, and that is down. Something that none of them wants as they hold too much of the fiction in their hands. They have not been able to sell it all off at inflated prices to the muppets of the world. We say NO.

So here it sets.

Who among them will make the first move for the exit doors? Someone will do it, someone big. They are convinced that they are as thick as thieves and will never flinch, but there is no honor among thieves.

The Saint's picture
The Saint (not verified) Charles Wilson Aug 2, 2016 10:23 AM

I'm waiting for the one in a billion year move to cash in.  It's coming this year - isn't it?  LMAO


CPL's picture

You've got to wait for the 20% handle drop across all the graphs then wait a couple of days and buy anything on the top 500.  Then like a couple of the guys on here play the end of day ramp on a drop day.  Remember, the machines don't like red and will manufacture capital out of thin air to jump the price.  It is after all just a computer program running it.

However if you are a contrarian's contrarian you do the long short on the X3 ETF's like faz/fas tna/tza.  The bear ones have only reversed split around 20 times on a 1 to 10 reverse split.  Literally buying a single share when they started would guarentee that you'd be holding around a million shares on a short that seems to just continiously reverse split magically because it needs to or it gets delisted.  

Since the system is build and engineered poorly to only go up you can leverage that condition to your benefit since the stock market now prints it's own money via the nuclear trading material known as X3 ETF's.  (or write options like everyone else)

shovelhead's picture

Why be shy?

Go 1 in a million. It's tried and true and it sounds good.

What ARE these mysterious unseen forces? They may be from your neighborhood

mary mary's picture

Some think these Reptilians live 10,000 years, easy.  Who knows?  Maybe this is the 25th planet Marky has helped plunder.

Rabbi Chaim Cohen's picture

To be a bit more precise, it is one of the unintended bizzaro world consequences that can be traced directly to years of cooperation between government, banks & corporations to commit unequalled market fraud and artificial manipulation.

Welcome to 1984, Atlas Shrugged, A Brave New World and The Road to Serfdom (redux) all rolled into one rotten burrito, and it's a BIG one we all get to enjoy.

froze25's picture

If you haven't read "tragedy and Hope" you will like it.

BocceBaal's picture

He is stating that if the market movements were truly random with this amount of volatility, one would expect to see this outcome once in 10,000 years.

He's not saying that this is a 1 in 10,000 year event. It's you who is ignoring math and logic.

mikla's picture

The quote makes assumptions based on market behavior for a terribly narrow span of time, by projecting into a 10,000 year timeframe.

It means the assumptions are invalid.  No data exists to say anything about a 10,000 year timespan.

The analysis is wrong.  The long-tail calculations are wrong.

True, we can make assumptions to establish that this is a six-sigma event.  Sure. Why not call it a ten-sigma event.  Why not call it a fifty-seven sigma event?  Those are all effectively the same assumptions -- projections based against data you don't have.

emorybored's picture

The boundaries can be extrapolated.          http://lagrange.physics.drexel.edu/    and,...http://everythingforever.com/hawking.htm

You might want to reaquaint yourself with Mr. Kalonovic's math.

Quantum Bunk's picture

Thats great.


But this is not a game based on morals or not. Eventually the printed money must dilute the stock of capital in the world and render this setup unprofitable. But it just doesn't seem to happen.

TradingIsLifeBrah's picture
TradingIsLifeBrah (not verified) Quantum Bunk Aug 2, 2016 10:11 AM

Remember back in like October last yer or whatever when everyone thought this guy was a genius, boy those were some good times, good laughs.

DeadFred's picture

Translation: it seems the boys and girls at the Fed have moved into options as well as currencies and VIX to move the market. It is their only hope at this point so expect more.

nibiru's picture

They are behind BOJ owning half of the ETF market.


Imagine what they will be able to do with NIRP! Draghi is going to look like a little pup

Takeaction2's picture
Takeaction2 (not verified) American Psycho Aug 2, 2016 10:13 AM

I apoligize for being WAY OFF TOPIC...One of my employees just showed me this.  You have to see these  guys.

JALAL Suicide BOMB PRANK.  Are you ready for some laughs at others FEAR....

Takeaction2's picture
Takeaction2 (not verified) Mustafa Kemal Aug 2, 2016 12:19 PM

That one was sad....

kingvaclav's picture

First time I've seen modern photography ever used in these hoaxes.  

RockRiver's picture

I might be a dumb ass, but when I look at a chart it looks like a consolidation effort to me. This is a bullish continuation pattern.

OpTwoMistic's picture

Excellent rant on the collaspe of Jap banks, bond market and spreading to you. Plan spoken. Enjoy!


Mornings With "V" 08.02.16 Feeling The Stimulus?

carbonmutant's picture

You have to drink a LOT of Kool-aid in order to be a Head Quant.

lasvegaspersona's picture

unless...the market isn't really a market...

Do they not clue these guys in or is it just a part they play?....I didn't read the book and the movie is making no sense.

VonPumperDic's picture



It means "Banksters will print money forever" = a 1 in 1 year chance of the event

Urban Redneck's picture

It's not a market now, it's a derivative of a market, or more accurately (and ironically) -- the stock market is A derivative of THE derivatives markets.

Urban Redneck's picture

It's actually worth saying twice, but anyone not smart enough to understand it on the first reading probably isn't going to see it the second time either.