Risk. Not. On.

Tyler Durden's picture

After a brief spike higher (just to flush all those stops) in front of Draghi's 'dis-believe' press conference this morning, markets plunged. Some wanted more but algos tickled us up to VWAP into the close once again though we note that once there - volume and average trade size surged, allowing those bigger momo players a better exit than mere mortals. Equities and broad risk assets stayed in very close sync all day with cross asset class correlation surging systemically, VIX rose and fell on the day ending down 1.4 vols at 17.5%  (after touching 19.25% after the European close) - but notably VIX is now more back in line with equity/credit implied values. The USD ends today up 0.8% on the week, and implicitly commodities tumbled (copper and oil  down 3-3.5% on the week and gold/silver -2%). Treasury yields bounced higher as stocks nibbled back to VWAP into the close but ended down 2-4bps (long-end outperforming). All in all - no capitulation, but a broad based derisking that seemed to benefit from some pre-positioning in protection (and help from the VWAP algos twice). Wil tomorrow's NFP be good enough to be bad or bad enough to be good (high volume and low average trade size suggests few want to position for it too aggressively).

S&P 500 e-mini futures (ES) saw two reversions to VWAP (red rectangles) - at Europe close and US close that were accompanied by heavy volume and large block size exits...


VIX surprised a few with its 'weakness' today as stocks sold off - but hopefully this will clarify - as it seems the warning we noted a few days ago of pre-emptive positioning was indeed what occurred and likely supported today's market modestly...


But broadly speaking risk markets clung together in a non-capitulative manner today - and notably gold (beta-adjusted) underperformed...


and across all risk-asset-classes correlation picked up (lower right) and equities tended to cling to risk all day (upper right). Despite some early shenanigans into the European close (upper left), equities stayed true to their rates/vol/credit capital structure. The VIX vs 'fair' equity/credit relationship reverted today (lower left) and it will be interesting to see if today's vol selling (unwinds of hedges) was accompanied by derisking in the underlying or simply a lifting of hedges (we suspect - given the VWAP reversion, high volume, and pick up in average trade size at VWAP that this was real money exits)...


Charts:Bloomberg and Capital Context


Bonus Chart: Terrible Truth - How many more jobs are gonna be lost thanks to algos? Knight Capital trades with a $1 handle after hours...

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SheepDog-One's picture

Sneaking suspicion NFP comes in at expectations. I think theyre terrified of big beat or big miss, then they'd have to actually do something.

spastic_colon's picture

it doesn't matter.....markets are pre-positioned for everything to be good news with the report ala the bernank....pure evil genius

HD's picture

Put your hands in the air...like you just don't care!!

Ain't no party like a QE party - 'cause a QE party don't stop!

jeff montanye's picture

perhaps i'm wrong, but imo the lesson of the second half of '12 is likely to be the impotence of central bankers (professionally).




Hype Alert's picture



Not too hot, not too cold.  Don't want to QE before the election.

ACP's picture

Put/call a little high too, relatively. Probably room for one more hard core ramp job.

slewie the pi-rat's picture

hey, SD1

i saw something earlier about Challenger Job Cuts in:  Gold Seeker Closing Report: Gold and Silver End Modestly Lower
By: Chris Mullen, Gold-Seeker.com

apparently, for july, employers are slowing layoff annoucements

Challenger Job Cuts

  • reading:  -44.5%
  • previous: -9.5%

small beat?  L0L!!!

Hype Alert's picture

Who's left to layoff?   Which also says if revenue is the current weak point this earnings season, then labor cuts aren't going to help earnings going forward.

AbelCatalyst's picture

My guess is 15k below expectations to keep QE on the table and not disturb the markets too much...

monogratis's picture

Unexpectedly, I think we should expect that our expectations are unexpectedly correct, and that we should not expect what we are expecting...

GernB's picture

That would be totally unexpected.

LawsofPhysics's picture

Forget risk, what about reality?

Drag Racer's picture



wake me when it returns

Law97's picture

....from your cryogenic chamber...

monogratis's picture

Let's put aside risk and reality, and keep passing the hopium pipe around... we haven't smoked it all yet, right?

GernB's picture

You have to factor that many of those smoking the hopium pipe voted in the geniuses who go us here. They voted them in on on total faith in their ability to deliver on such well defined objectives as hope and change. They voted baed on their faith in these politicians nearly god-like ability to transform the US into a utopia. You know, a place where everyone gets along, the poor never have to pay for anything, everyone's needs are taken care of, and it is all paid for by a gratefull few who only work because they find it fulfiling, and cheerfully pay for it all while working hard and singing along with small forest animals.

People so nieve as to vote for someone on a promise of hope and change aren't going to give up such well founded faith based on something as flimsy as reality. It's going to take a brick hitting them in the head, or hitting their investment accounts, before they stop smoking the pipe.

monogratis's picture

If the municipal bankruptcies pick up speed, which they are likely to do, there's going to be a lot of bricks hitting a lot of heads.

GernB's picture

True. But i thought the Bernanke was going to save us with that QE thangamajig.

AldousHuxley's picture

get out of equities and bet on a horse instead like Ann Romney

you get $70,000 tax deduction for owning a sport enjoyed by 0.1%

Hype Alert's picture

"Will tomorrow's NFP be good enough to be bad or bad enough to be good"  that's awesome. 

Thanks Ben, you've truly made it unreal!

GernB's picture

It will most likely be unexpectely average, which will be neither bullishly bad or bearishly good. And as a result the market will rally, because its Friday and you cant have a down monday without pumping it up Friday. Down Mondays are all the rage these days, you see.

mayhem_korner's picture



To summarize my technical analysis...the second chart looks pecularly like the plant from the Rocky Horror Picture Show.

Hype Alert's picture

I saw the same thing!  Really bad day to stop sniffing glue. 

Hype Alert's picture

It's not just Faceplant.  Imagine if the entire market went down instead of up.  The loss of capital gains taxes would be very bad for the administration.  So we have to inflate stocks with freshly printed dollars so people can pay real taxes on the gains.  Yes, it's a lose lose for you.

HD's picture

Hedge funds are taxed at 15%, TBTF banks don't pay much of anything (Bank of America paid no taxes at all) and retail is out.

The only taxes being paid are the poor SOBs that are penalized for early withdrawal on their 401k or IRA...

stocktivity's picture

...but Benny saved you from paying any tax on your savings account....

bdc63's picture

Let's do the time warp again ...

fuu's picture

Little Shop of Horrors?

mayhem_korner's picture



Good catch.  I've never seen either, just the posters 'n such.  Let's just say they're not my preferred 'genre'...

slewie the pi-rat's picture

awwww... c'mon!

edit:  oops. i put up an old link and it's binTakinDwn...

NoControl's picture

................... you mean Little Shop of Horrors


and Yes it Does..............

NoTTD's picture

"Little Shop of Horrors"  not Rocky.

Overfed's picture

"Feed me, Ben!" but....but...."Feed ME!"

StychoKiller's picture

Audry II from "Little Shop of Horrors"

adr's picture

SO why does the "market" always hit the VWAP when the markets close?

Other than pure manipulation of course.

NoControl's picture

S&P 500 e-mini futures (ES) saw two reversions to VWAP (red rectangles) - at Europe close and US close that were accompanied by heavy volume and large block size exits...

The way I've come to understand it is that there are algos at work that move the price to the VWAP.  The theory might be that price usually reverts to average so they take advantage of that and pocket some $$ in the process.  This can only be done blatantly in a low volume time period since any heavy volume would probably be to the down side and would result in losses.

The side benefit of this price action is that any traders that want to sell a large amount of contacts/shares can wait for one of these algo-driven returns to VWAP and then dump their positions at a higher price and so taking less of a loss (those are the spikes in volume you see circled in the chart).


if any of that sounds wrong\incomplete pelease correct me

credittrader's picture

A simple VWAP example:

A lot of institutional order-fillers (e.g. KCG) will get an order to buy/sell a LARGE block from a buy-side firm (who just got inflows and need to do something for example). The buy-side firm will want the highest price possible if it is selling and lowest price possible if its buying - but expecting to buy at lows and sell at highs of the day is dreaming and so - they judge the brokers' performance using VWAP.


Obviously there is 'art' to positioning a LARGE order and so instead of in the 'old days' when an experienced trader would call around and break up the trade, spread it off to people in an attempt to get the best average fill, now this is done algorithmically. How does the buy-side firm know it got a 'good' fill (after all they also have algos that look at market impact - how much would price move if I sold 100k shares, 200k? etc)? Well that's where VWAP comes in - the brokers get paid to fill the orders as 'close' to VWAP as possible and are even incentivized to beat VWAP - so they build algos (the tickler as Tyler puts it for instance).


In the case of today - it would appear there were some chunky orders to SELL at the European and US closes - and so the algos use very small orders to 'tickle the bid side up' - show size, take it away, show it, take it away, and once they get it up within a certain sigma of VWAP (where they think they can dump in size without massively moving market again) they will sell the bigger block. This way they are SELLING (for the buy-side firm who wants to sell) at a level that is most beneficial for them and the broker.


Look at the EU close and US close today in that chart above - retail gets played with small lots whipping up the bid stack of the ES order book and then flush - size comes in near VWAP and everyone is happy. Of course this is no secret and so the algos are constantly searching for other algos 'tickling' one way or the other to try and front-run the inevitable heavier block move.


Hope that helped a bit - VWAP is an entire world of its own...

trebuchet's picture

plus VWAP = statistical mean reversion   so algos "anchor" to that as their dynamic realtime trend reference

Neethgie's picture

This was a triumph
I'm making a note here, HUGE SUCCESS
It's hard to overstate my satisfaction

steveo77's picture

I have had a long bias this last week or so, and that is sure not working so far. HOG short is my only winner.  
Those hoping for a strong Fed "statement" of action to buoy markets were certainly disappointed. At least for now. Overall, the "wrong sectors" are leading advances, whereas in a "good advance" the Nasdaq and Russell would lead, they have been weak. See chart at bottom for comparison of all 4. 
My slant is upward, with the trepidation of establishing more longs after being whipped out of 4 positions with losses. Indeed long is the "hard trade" here.  
Funny how after a few down days the mind can start seeing bearish patterns. JCI and HON for instance..... 
http://oahutrading.blogspot.com/2012/08/i-have-had-long- bias-this-last-week-or.html

lolmao500's picture

I'm so sick of losing money with silver. Screw ya ZH for making me buy it in the first place.

Beam Me Up Scotty's picture

Quit playing with paper silver, buy physical.  Average down.  Watch you stack grow.  If the price declines, you still have the same number of oz's.

AldousHuxley's picture
Goldman: "Stay Long Gold"  



now look at gold chart...it peaked in sept 2011




John Paulson Adds to All But Two Gold Company Holdings





Paulson Said to Tell Clients Gold Fund Will Top Others




GET IT?????? Hedge funds tell you to buy when they want to sell or have positioned themselves already.

Neethgie's picture

Averaging down is a losers game in everything else but the exception is silver? this is retard logic, if the price declines youll still have the same number of oz's is like saying if you bought 100,000 fb shares and the price goes down you'll still have 100,000's fb shares, its the same backwards logic. silver has been a losing game for a while

akak's picture

Silver has been a "losing game" only if you are playing for the short term, and have no understanding of the bigger picture and the inevitability of the collapse of the fraudulent and tottering financial system and its associated fiat currencies.

Neethgie's picture

please thats such a tired line, when the financial system breaks or if, ill buy then, till then stacking silver is moronic... 

i guess the long game is you watch your holdings lose cash daily but keep telling yourself the system is going to implode.