Yesterday's late-day rampapalooza seemed like just the confidence-inspiring rally that was needed to enable sellers out at better prices. The absolute schizophrenia (debate-day shenanigans?) remains remarkable - and today the silver-lining appears to be the Dow Transports - which end green. But as always context is key - the rest of the US equity market is converging down to the Trannies measly 0.8% YTD gain in a hurry. Stocks and broad risk-assets were once again highly correlated as systemic weakness dragged an exuberant overnight equity market back down to reality. Today's higher-beta weakness was widespread but AAPL's crashtastic 3.25% plunge on an underwhelming sales and over-expensive product seems as good a catalyst as any (and if anyone on TV tells you its all the shorts driving it - just think about the dominance of this stock in all those long-only manager's books that are now underperforming - long sales at VWAP!!!). USD strength dragged commodities lower - Oil underperforming, Gold outperforming (though lower); Treasury yields cracked lower (down 6-7bps from high to low); and credit modestly underperformed as VIX also rose more than implied by stocks as protection was bid. The S&P has lost the Bernanke Floor and thanks to some late VWAP support is holding at Draghi's Dike.
Today marked the biggest 3-day slump in the S&P 500 in 3 months - on huge volume once again - making a mockery of yesterday's late-day ramp...notice once again the pull up to VWAP today (blue line) which was faded into the close...
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Year-to-Date US equity index performance...
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leaving the S&P at Draghi's Dike - having lost Bernanke's Bottom...
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And once again - its clear that the machines are under pressure to get the big longs out (not just short-sellers) as VWAP points are magnets for volume...
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Broadly speaking - stocks over-reacted overnight and overshot to the downside (relative to risk assets in general) - catching back up into the close (which was around ES VWAP - suggesting some balance)... systemic correlation was high though
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For a sense of what market participants have been levered to in a risk-on world - that appears to be falling apart - its is useful to see what is underperforming... to wit: on a correlated beta basis (i.e compared to how its moved in the past) - Oil is being sold hardest, followed by stocks, with Gold and the USD in line, and Treasury buying the least aggressive (perhaps as MTG spread unwinds continue)...
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Today's VIX move is a little exuberant as protection is heavily bid - well north of Draghi-Dike levels...
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But with all the talk of VIX breaking out - we note that in fact the implied vol premium to short-term realized vol (at 10-week highs) is in fact at its lowest in a month - the key now is if the crazy swings of the last few days continue then we see the crowd of vol premium sellers finally get their fingers snapped off in front of the steam roller...
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MTG spreads are +7bps post QEtc. and retail mortgage rates are only -3bps! Thanks Ben!
Charts: Bloomberg and Capital Context [11]
Bonus Chart: Netflix Tilson'd...-14% afterhours...
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