Deutsche Warns Of 10% Decline as Market Reaches "Mania" Level

Tyler Durden's picture

Realized volatility in the US equity markets has been extremely low, and much discussed, but, as Deutsche Bank's David Bianco warns this is "the quiet before the storm." There are five catalysts for increased vol through Autumn but most worrying is the "High P/E, Low VIX" scenario is very risky having reached "mania" levels.

Current volatility is a poor indicator of future risk: High PE / low VIX very risky

The standard deviation of annualized daily S&P price moves has been 6% since August started.

The lowest 30 day+ vol since Aug-Sep of 1995 and versus a 14% monthly average since 1960. Only 1964, 1993 & 1995 had vol at such low levels for more than a few months and these are the only three years the S&P didn’t suffer a 5%+ dip from its one year high.

Dips of 5%+ usually occur twice a year. 2016 had 2 dips already and we expect another soon.

Unlike the straight-up halcyon years above, 2016 is later in the cycle with 0% S&P EPS growth vs. strong double-digit growth in those years.

Post recession normalizing Fed hikes were behind by 1964 & 1995. 1964 was an election year, but LBJ was an in place successor. Current volatility is a poor indicator of future risk. It has a long history of mean reversion and is prone to sudden spikes. Our fundamental assessment of S&P risk puts it lower than 2008-2012, but not below long-term history. We take concern with this very low vol amidst low volume and high PEs.

One of our favorite risk sentiment indicators, which we use in a contrarian fashion, the PE/VIX ratio signals a very complacent market.

It has not ended well...

Deutsche sees five catalysts to increased volatility this autumn:

1) analyst btm-up 2017E S&P EPS cuts during 3Q reporting,


2) no Fed hike in Sept with no clear explanation as to when,


3) macro data that suggests an "L shaped" capex recovery,


4) US election and policy uncertainty,


5) PEs fully dependent on low bond yields at bond substitutes and also at cyclicals, like Energy & Industrials, when low yields should be a greater benefit to PEs at non-cyclical growth sector like Tech & Health Care. Near-term we favor Utilities & Telecom over Financials. We favor lower PE mega-caps.

Hiogh P/Es typically come with higher volatility and more dips...

We doubt equity volatility stays low, we think an 8-10% S&P decline looms.


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Cognitive Dissonance's picture

Only 10%? Hell, after Friday we're already one quarter of the way there.

espirit's picture

If DB would just beach itself, the scavengers would take care of the rest and we wouldn't have to listen to their death throes.

Escrava Isaura's picture

10% decline?

Who cares.

It makes no difference for about 97% of the population.

And it will recover in 5 hours.


Winston Churchill's picture

Thats why I always cross my 7s. So easy to mistake for a 1 otherwise.

Escrava Isaura's picture

Same here. Grew up crossing it.


bleu's picture

Too bad America is NEVER getting better.

Zarbo's picture

Ah, yes.  The old is it a zero or an oh ->  0 or O and the seven versus one -> 1 7    Before we got graphics and fonts, there really was a problem.  I still follow the old habits and it confuses the students I teach (for a while)

mototard's picture

Took me a second to catch this one.  Good stuff.  LOL when I got it.

Knave Dave's picture

In this economy, you should probably cross your heart.

Trip Fontane's picture

Exactly. 200 points is just a 'bullish retracement'. Then back to new all time highs.

Butter-Cup's picture

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jm's picture

That market call is so safe it doesn't even matter.

adanata's picture


Interesting. How will they play it? Can they keep it up for Hildebeast? [no pun intended... yuk] How can they spin it to be Trump's fault? Can the peanut gallery see a dive as anything but the responsibility of our financial overlords? Stay tuned.

Citizen_x's picture

Possible... sure.  What is the purpose of a current dive ?

Qui bono ?

debtor of last resort's picture

Let's have a 10% decline in cb balance sheets.

bruinfan's picture

Let me know when Deutsche Bank declines 100%.

Rainman's picture

When Granma cuts 25bps all them fancy charts won't mean sheet.

Father ¢hristmas's picture

Listening to Yellin speak is moar painful than listening to Hillary Clinton, at least when Hillary isn't shouting.

Yellin's speech pattern is weird and choppy, which makes the lies and idiocy hard to absorb.  Hillary's a fearless murderer who genuinely believes her lies, so it's a bit easier to digest.  You actually get the feeling you are irritating her to the point of violence when you challenge her on her lies.

Janet's also got a Chicago accent and she's supposed to be from Brooklyn, don't know what that's about.

Phillpots's picture

40% minimum so get stuffed Deutsche and the rest of you stupid f**king banks. Sooner you lot are gone and replaced the better. 

NoWayJose's picture

I must be getting old. I can remember back when 10% declines were once a normal part of a functioning market.