Late-Day Reality Check On Dramatic Risk Off Day

Tyler Durden's picture

ES tumbled back down to its VWAP at the close of the day session after mounting a run back towards 1200 in the afternoon. This equity move was the second total disconnect from credit markets of the afternoon and reverted back to credit's sanity though HYG was clearly the instrument of choice (once again) for credit hedgers looking for lower cost shorts or liquid hedges. The USD was modestly higher from Friday's close and Oil rallied back this afternoon to almost perfectly match the USD shift. Gold, Silver, and Copper all lost significant ground (around 2.5%) though all were well off their early European-close-liquidation lows. TSYs rather interestingly closed near the high yields of the US day-session - though well down on the day - as 2s10s30s and Oil were the main drivers of broad risk-asset strength. CONTEXT remained notably below ES all day - maintained by the weakness in Gold, 10Y, and AUDJPY as the EURJPY ripfest into the EU close helped the risk-on crowd modestly. It was a muddled day with correlations breaking down and dramatically illiquid-looking moves as the late-day drop on very large volume suggests some sense of sanity with the uncertainty we face was priced in.

The US equity and credit day had 4 clear episodes today from our perspective. 1) pre-open ramp in ES into the open to entice would-be dip-buyers - credit ignored it almost completely and CONTEXT remained significantly down; 2) As selling picked up, HYG became the instrument of choice for shorts/hedgers and notably underperformed both stocks and HY spreads, markets converged back at the lows into the European close and were helped a little of the lows by a completely news-less 60 pip ramp in EURUSD; 3) Some chatter about the possibility of the super-committee still coming up with something pushed a little risk-on but in our view this was much more algo-driven in low volumes as we reverted perfectly and stalled at VWAP -note that HYG did not move on this rally at all; and 4) another surge for 1200 and the open of the day session moved everything higher but ES was the highest beta and most extravagantly out of sync - only to revert back in line with IG and HY credit.

HYG's relative underperformance, and SPY's late day catch up are most evident when judged from the full capital-structure perspective (since the relationship between stocks and credit is not linear). Based on VXX (vol), TLT (rates) , and HYG (credit), SPY was interestingly outperforming most of the day (as we noted above). Perhaps it is the liquidity in HYG (relative to HY bonds) and the leverage in VXX that was the driver but the SPY Arb model framework showed the basket indicating more selling pressure with two retracements and a perfect sync into the close as SPY sold off back to meet its much less sanguine counterparts. The shift in the model price was also driven by TLT's relative underperformance in the afternoon - as intruiguingly TSYs hung closer to their day-session high yields than risk-asset weakness might suggest.


At the close HYG was marginally off its lows while ES, HY, and IG were about mid-session levels. We urge a close inspection of shares outstanding for HYG as if we start to see the destruction of units (as opposed to creation units) then we know the secondary HY bond market cannot withstand that pressure and could quickly deteriorate. We have warned of the extreme level of the advance-decline line for HY debt recently and remind readers that we also noted the 'stuffing' of the HYG ETF which we suspected was going on. The last few days has seen HYG underperforming, shares-outstanding stable (not rising anymore) and Advance-Decline rolling over very fast - worrisome.



Today's secondary bond trading was thinnish (technical term) with HY seeing balance (modest net-selling) and IG modest net-buying). The focus seemed to be on up-in-quality as HY rotations into AA-BBB was most evident. The rise in TSY 2s10s30s was mirrored in Corporates with the 1-3Y most net sold and the <1Y and >12Y seeing the most net buying. It was clear that short-dated financials (BAC, JPM, BNP, ALLY) were among the largest net sold (get me out!) and there was modest duration extension into the 1-3Y higher quality (low spread names).



FX markets saw three regimes, flattish overnight, higher volatility during the European hours, and then flattish during late day US. This makes sense and we suspect the late surge in EUR against the USD was more liquidity-based USD liquidation and EUR repatriation - TSYs did sell-off into that period also. AUD was the currency today as carry trades were tossed.


Commodities in general rallied from around the end of the European day - suggesting the liquidations were European-firm-driven. Oil managed to scamper all the way back up to perfectly sync (its loss) with the dollar's gain today and Copper, Gold, and Silver (while notably volatile intraday) seemed to miraculously converge into the close at around 2-2.5% losses from Friday's close. Silver managed a 3% rally off its intraday lows.

Taking into account CONTEXT and the empirical relationship between HY and equity markets through various business cycles, the S&P 500 got its closest to some semblance of value relative to credit in over a month. 1164 is the current expected fair-value for the S&P (which can be monitored intraday here).


Charts: Bloomberg

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imsaul0968's picture

For those of you who invest in an IRA or for long term goals, theres a better approach than buy,hold,hope. Stocks follow the economy so analyzing the economy, specifically the factors that are "leading indicators" and having exposure to equities only when the economy is headed in the right direction and avoiding equities in favor of safe haven baskets is a much more logical approach. And missing the major drawdowns is the only way to help ensure meeting your goals.  If you are interested in investing in a portfolio that tactically invests in equity and safe haven baskets via ETF's automatically, please email me at:

and I'll add you to the weekly market commentary & portfolio update distribution list.  Its free to add you and you can follow along our model and our views.  We have been RISK-OFF since 6/30 so have missed all this wicked volatility. Currently invested in short duration treasury baskets as flight to safety drives interest in our debt. 

BeerGoggles's picture

Ray Dalio says commodities will sell of as the Fed tightens in this deleveraging so what's the point in being in PMs?

rumblefish's picture

did i miss the fed tigtening?

I tought they committed to ZIRP well beyond 2013.

qussl3's picture

Sounds like Ray wants to buy.

rumblefish's picture

can some explain the risk off/ risk on comments that permiate the financial blogosphere?  I've  seen it used in so many different contexts i'm convinced I don't know what it means.

Zero Govt's picture

"risk off" means the arse has fallen outta the market... Credit Ratings Agencies use this term 36 hours after their AAA rated toxic junk gets torched while you're still holding it (you won't forget this term after you've experienced 'the burn' of being flamed by CRA's)

"risk on" means dump your dosh on the exchange anywhere you can, fast as you can, because Benny is out in his Helly that afternoon dropping cash bombs and you want in on the ride when the walking dead markets get pumped with fresh junk money.

Welcome to zombie investing on zombie markets

The Fonz's picture

Being a trader isn't so much about making money, it is about managing risk.  When you see risk on it means that everyone is taking risk... for returns.  When you see risk off it means people are ditching risk. The market tends to move more or less as one, so when they say risk, they mean the markets, all of them.

mynhair's picture

Wait for tomorrow, when the Stupor Committee failure is news.  Lots of rumor buying today, and 201K funds of course.

e-man's picture

In case the market melts up tomorrow, here is a list of the current applicable rumors: 

  •         China will bail out Europe (in exchange for all of Europe’s gold). Rumor value: 23 minutes
  •          Brazil will bail out Europe (in exchange for keys to WTO). Rumor value: 11 minutes
  •          Russia will bail out Europe (in exchange for keys to NATO). Rumor value: 4 minutes
  •          India will bail out Europe (in exchange for keys to Pakistan). Rumor value: 3 weeks 7 minutes
  •         EFSF will borrow $3 Trillion from ECB, using borrowed CMBS on defaulted loans as collateral. Rumor value: 4 hours 23 minutes
  •          Accounting Error: [Insert name here] found an extra $3 Trillion in the couch. Rumor value: 3 minutes
  •           Warren Buffett will bail out Europe after strategic economic summit conference with Mr. Rubber Ducky and Mr. Bubbles. Rumor value: 2 days, 11 minutes
  •          Maria Bartiromo and Erin Burnett will team up in Davos and use proceeds of charity event to bail out Europe. (Get your mind out of the gutter!  What were YOU thinking?) Rumor value: 3.7 femtoseconds
  •          Belgium will sell peripheral European nation electoral votes on eBay. Rumor value: 4 weeks  31 minutes
  •          Belgium will sell peripheral European nations on eBay. Rumor value: 5 weeks  7 minutes
  •         Mario Draghi will announce a voluntary 450% haircut on European debt, and allow 24 hours to settle ensuing margin calls. Rumor value: 3 weeks, 11 seconds
  •          In a little less than half an hour, Wesley, Inigo and Fezzik will get in the castle, break up the wedding between Buttercup and Humperdinck, steal the princess, kill Count Rugen, make their escape, and then rescue Europe. Rumor value: this one could actually work if you close your eyes really tight and believe


Mugatu's picture



What's a femtosecond?  Is that the time between when your girlfriend's period starts and when she starts bitching at you?

e-man's picture

Hmmm, I don't think it means what the ECB thinks it means!

freshkapital85's picture

rumblefish.......risk on=bullish sentiment risk off=bearish sentiment

chump666's picture

I'd be careful here, looks like a bear trap.  Our major sell off is due in December on the European or China doomsday news kicks in.  I am betting on China credit bubble crash end/early next yr.  Last session sell off was pre-curser to a bigger liquidation trade.  But not just yet. see commodities sell like they did, hmmm

Mike2756's picture

Looks like they are trying to front run a year end rally. Silver did close above the open and fill the gap. Grains and energy were not down too much, value buyers stepping into forced liquidation? Someone came in big around 1:30 in oil and gasoline.

slewie the pi-rat's picture

if i understand tyler, yes, value buying and "squaring" after what seems to have been liquidation-like selling during the europe open

are you talking about a rally in commodities or stocks, or maybe both? 

remember tyler's old "buy cheap straddles" call?  well, i do!  and it's alive and probably well-er than most, about now.  those cheap puts we bought over that last rally are now getting fat as the holiday bird, and it might be a good idea to look at  some cheap calls to nibble with w/ the cranberries...

chump666's picture

Watching Asia, the thing is, commodities are getting hit hard again.  FT ran article on how the China property bubble is now crashing (it was a wire report).  if Asia consolidates on their open, should lift into Europe open etc.  Looking at a top range to buy mini shorts on indexes.  I think the market will be hit hard end/early next yr.  The Santa rally doesn't really make sense with the Chinese.

The selling has less to do with Europe now.  The region is a zombie.

slewie the pi-rat's picture


i agree with you about the commodities, chump_63 but i wasn't sure what he meant

and, there is a point where if certain commodities get cheap, it helps certain stocks

this last rally, as we followed it, here, seemed much ado about short-covering b/c of a strong EUR caused by repatriation to france and others who were liquidating around dexia and other balance-sheet-challenged banks holding sovereign IOUskies

the landscape is covered with zombies and bullshit;  earnings are suspect;  growth is highly suspect;

  1. peter is now robbing paul so he can pay paul back for robbing peter
  2. nobody feels like working
  3. panama red is back in town
  4. BiCheZ!
chump666's picture

slewie,  this is what is flipping commodity markets out  at the moment.  Also risk trades ala AUD

0046 GMT [Dow Jones] Upside for the yuan against the dollar is declining, with October data showing net outflows of foreign exchange for the first time since 2007, Credit Agricole says in a report. The figures suggest that the People's Bank of China "probably intervened to support its currency" in October, as market pressures pushed it down


Mike2756's picture

Wtf just happened to the yen? Reality catching up?

Mike2756's picture

Market is holding up very well so far, aussie is up a bit. Not much volume, though (short covering?). No doubt there are some banking on a good resolution to the Europe problem.

Motorhead's picture


Mark123's picture

After the close we get this headline:


"HP reports revenue above Street estimates"


When you read the details:


"For fiscal 2012, HP is projecting earnings of at least $4 per share, excluding items.

Wall Street analysts on average expect the company to earn $4.54 for the full year, according to Thomson Reuters I/B/E/S."

sabra1's picture

where is all the thanksgiving hype? hardly any news on hopeful sales, travel plans! it's not 'cause they're planning another kind of holiday on friday, like maybe, a BANK HOLIDAY!!!!

quacker's picture

The largest gap between the msm and blogosphere I've seen yet. Around the blogosphere: massive liquidity crisis and dumping of soverign debt, yield spreads, China popping, Europe recession, more MF Globals - all coming together for perfect storm.

Bloomberg and CNBC: Shock that the market would react this way - Super Committee should have already been priced in and ALL domestic data 100% roses for the US, so what's the fuss all about?

Completely and totally living on different planets at this point.

Rainman's picture

Poets and pimps view the world differently, I guess.

michaelsmith_9's picture

SPX looking for support, GC signals bearish price action to continue, and EURUSD continues to stall.