CBOE

Today's modest bounce in stocks - considerably removed after-hours - does not provide much hope for those looking to buy the dip with the Dow still down over 1000 points year-to-date. In fact, as we discuss below, troubling news just continues to pour in from all over the world... For those that are not interested in the technical details, what all of this means is that global financial markets are starting to become extremely unstable. Consider the following...

The biggest fear the market currently has is not the ongoing crisis in the Emerging Markets, not the suddenly slowing economy, not even China's credit bubble popping: it is that Bernanke's successor may have suddenly reverted to the "Old Normal" - a regime in which the Fed is not there to provide the training wheels should the S&P suffer a 5%, 10% or 20% (or more) drop. Whether such fears are warranted will be tested as soon as there is indeed a bear market plunge in stocks - the first in nearly three years (incidentally the topic of the Fed's lack of vacalty was covered in a recent Reuters article). So, assuming that indeed the most dramatic change in market dynamics in the past five years has taken place, how does one trade this new world which is so unfamiliar to so many of today's "younger" (and forgotten by many of the older) traders? And, more importantly, how does one look for the signs of a bottom: an Old Normal bottom that is. Courtesy of Convergex' Nicholas Colas, here is a reminder of what to look forward to, for those who are so inclined, to time the next market inflection point.

There is one main reason why complacency is bad: selloffs. Because as Bank of America explains, in an environment in which there are "too few bears", and where investors are "not prepared for a downside correction", when you do finally get a sell off for whatever reason, with nobody hedged and otherwise prepared for such an outcome, the only logical continuation is piling on until one gets selling exhaustion. And in a world in which hedge fund leverage is about 500%, by the time exhaustion comes, there will be very few left standing.

What are you afraid of, exactly? ConvergEx's Nick Colas notes we all have our phobias and fears, some logical and anchored in reality and others irrational but still powerful; but for the capital markets currently it seems there is no fear. The CBOE VIX Index started the year at 14.2 and has fallen to a close of 12.9 today. That move, Colas adds, has dragged the IVs of everything from U.S. large cap energy stocks to gold to corporate bonds lower in its wake.  Even expectations for Emerging Markets equity volatility are in retreat as we start 2014. But, when near term historical or implied volatility becomes this complacent, it seems appropriate to spend a little more time pondering what might go wrong.  Markets, after all, have the entire “What should go right” side of the trade well understood and reflected in current prices. In that spirit, here is the "Top 10" list of what might take us off the rails of complacency in 2014.

Treasury curve flattening continues to gather pace as 30Y bonds rallied their most in 8 months today (even as the shorter-end sold off modestly) but on the week the flattening is dramatic to say the least. Of course, all eyes were on stocks as the Dow and S&P leaked (post European close) to new highs (and the Russell gained back yesterday's losses and some to close the week's winner +3.5%). Gold (and silver) rallied on the day back over $1200 (but closes -3% on the week). VIX followed a similar pattern to yesterday with an early drop followed by a drift higher as it's clear managers are protecting into year-end. Quad witching and rebalancing provided some fireworks into the close as volume rose and stocks slid (as Nanex noted - something broke - lots of micro-crashes/rallies) as CBOE quotes stopped with 10 minutes to go.

UPDATE: 23 minutes later - Self-Help is revoked...

Well that didn't take long...

• *BATS OPTIONS DECLARES SELF-HELP AGAINST CBOE
• *CBOE: CT BC85 HAS BEEN SWITCHED TO ITS BACK-UP

But, as CNBC previously noted, we are getting used to these "broken markets" by now so it doesn't matter...

The recent strong rise in the so-called CBOE SKEW index is yet another among the various divergences that make the stock market's current advance suspect. Skew measures the perceived tail risk of the market via the pricing of out-of-the-money options. Generally, a rise in skew indicates that 'crash protection' is in demand among institutional investors. An unusual move in the skew index (which historically oscillates approximately between a value of 100 and 150) is especially interesting when it diverges strongly from the VIX, which measures at the money and close to the money front month SPX option premiums. Basically what a 'low VIX/high skew' combination is saying is: 'the market overall is complacent, but big investors perceive far more tail risk than usual' (it is exactly the other way around when the VIX is high and SKEW is low). In other words, a surprising increase in realized volatility may not be too far away.

• Republican Civil War Erupts: Business Groups v. Tea Party (BBG)
• Budget fight leaves Boehner 'damaged' but still standing (Reuters)
• Madoff Was Like a God, Wizard of Oz, Lawyers Tell Jury (BBG) - just like Bernanke
• Republicans press U.S. officials over Obamacare snags (Reuters)
• Brilliant: Fed Unlikely to Trim Bond Buying in October (Hilsenrath)
• More brilliant: Fed could taper as early as December (FT)
• Russia Roofing Billionaires Seen Among Country’s Youngest (BBG)
• Ford's Mulally won't dismiss Boeing, Microsoft speculation (Reuters)
• China reverses first-half slowdown (FT)
• NY Fed’s Fired Goldman Examiner Makes Weird Case (BBG)

As markets twiddle their thumbs waiting on Washington to come up with a political solution to the Federal Debt Limit/budget debate, ConvergEx's Nick Colas decided it would be a good time to review the academic literature on how markets discount expectations in the first place. Behavioral finance posits that human nature skews perceptions of risk and return, causing everything from irrational risk aversion to asset price bubbles. Against this current backdrop of theoretical uncertainty, measures like the VIX are currently somnambulant.  So, using the modern vernacular, WTF?  The bottom line, Colas explains, is that Wall Street thinks it has the current "Crisis" all figured out: a last minute deal with no Treasury default.  And just as we haven’t sold off materially during this drama, don’t expect a huge (+5%) lift afterwards.

UPDATE: *CBOE: CFE WILL OPEN THE VX FUTURE PRODUCT AT 8:10 AM CT

It would appear that the overnight melt-up exuberance of an optimistic investing public has been stymied as the exchanges break once again. Following record volume levels on VIX options this week, we are told this morning by CBOE:

• *CBOE: CFE EXPERIENCING TECHNICAL ISSUES
• *CBOE: CFE EXPECTING DELAYED OPENING FOR THE VX
• *CBOE:CFE WILL BUST ERRANT VX, VXT TRADES FROM 7:00-7:12:01 CT

SSDD... Let's hope Jack Lew has something positive to say and doesn't "surprise" an unhedged market.

Stocks have fallen for 9 of the last 11 days since the Un-Taper and the S&P has falen 3.7% from its highs. Volume today was above average (as we note CBOE SPY options volume set an all-time record yesterday) and thanks to a 1% or so rally off the lows on the back of a restatement that Speaker Boehner doesn't want to see carnage, the S&P managed to scramble back above the 50DMA. A late-day collapse (what no VIX pumpathon today?) closed us below that crucial level for the first time in a month. VIX rose 1 vol to 17.6% by the close (off its highs). Treasuries rallied in general (but the 30Y ended the day unch as the curve steepened notably). The USD fell some more  (-0.65% on the week) as JPY and EUR strength didn't help but gold and silver closed unch, oil and copper down 1%.

UPDATE: *NASDAQ, NYSE ARCA, AMEX OPTIONS REVOKE SELF-HELP AGAINST CBOE

The stock market is trading down - therefore, options markets have broken:

• *BATS OPTIONS HAS DECLARED SELF-HELP VS CHICAGO BOARD OPTIONS
• *BATS: ROUTING TO CHICAGO BOARD OPTIONS EXCHANGE SUSPENDED
• *NASDAQ OPTIONS MARKET (NOM) HAS DECLARED SELF HELP AGAINST CBOE

Seems that options markets were not broken last night as VIX was banged into the close?

On a day when the CBOE was struggling to disseminate data, exchanges proclaiming self-help against one another, weekly expirations and an AAPL share price well below early week pin-risk levels, it makes perfect sense that it would be a VIX-sparked momentum ignition algo that would lift a super-low-volume day in US stocks from perfectly at VWAP to close at their highs (banging them 0.25% higher in the last 3 minutes of the day)... all we can say is WTF...

Anyone else get a sense of deja vu? Following CBOE's fail this morning, now BATS and NASDAQ have declared self-help against the CBOE...

• *CBOE HAS NO FURTHER COMMENTS REGARDING ITS COMPUTER SYSTEMS
• *CBOE INVESTING CURRENT DIFFICULTIES, SPOKESPERSON SAYS

As of 10:02AM CT, *CBOE’S C2 AND CBSX HAS HALTED TRADING