Goldman Discovers Something Odd: Stock Moves Are Increasing Even As Index Moves Are Decreasing

One wouldn't know it by looking at the moves in equity indexes, but this earnings season has been unusually volatile for stocks, which however has yet to translate into bigger moves at the macro level. That is the bizarre observation made by Goldman's derivatives strategist John Marshall (whose team grew by one when ex-Deutsche Banker Rocky Fishman joined recently).

As Goldman shows in the chart below, while earnings day moves have increased in the US and globally, and stock dispersion generally has jumped to the highest since the Trump election, index moves have been the smallest in years. Goldman believes this is further evidence "of increased uncertainty in the equity market."

Quantifying the delta between the two vol indicators, Goldman writes that over the past two weeks, the SPX has moved an average of 0.17% per day (1-standard deviation BELOW its 3-year average), while looking under the hood at the stocks in the S&P 500 the standard deviation of returns has been 1.8% on average (1-standard deviations ABOVE its 3-year average). As an indication of just how much turblience there is below the surface, earnings day moves are 4.2x average daily moves for US stocks (3.6x for European and 2.3x for Asian) in this earnings season so far.

Using the charts below, Goldman shows the earnings day absolute move in stocks relative to the non-earnings days 1 month before and after. This includes data through November 9, 2017 for the current quarter. Earnings day moves are above average levels relative to the past decade, while non-earnings days have had lower volatility.

What does this bifurcated volatility pattern mean? According to Goldman, "this as evidence that fundamental uncertainty is rising (stock moves on earnings days) while general macro fears have fallen (stock moves on non-earnings days)." In practical terms, and based on the relationship of index volatility and the standard deviation of S&P 500 stock returns over the past 15 years, Marshall writes that he would expect "the SPX to be moving 90bps per day rather than the current 17bps. This implies realized volatility above 15%." Of course, that may not be possible (or allowed by central banks) because as we wrote two weeks ago, the beta of VIX spot has exploded to -19, which means that even a mere 90bps down day in the S&P could launch a self-reinforcing vol cascade which crushes the millions of vol sellers, unleashing a another sharp correction, or worse.

Goldman's conclusion:

A rise in single stock volatility is generally associated with a decline in equity returns. Based on the relationship between the standard deviation of S&P 500 stock returns and forward returns in the SPX over the past 15 years  (controlling for index returns and index volatility), this elevated level of stock volatility would suggest a decline in the SPX of 0.8% over the next two weeks +/- 1.5%.

Alas, that observations is completely meaningless as due to the margin of error, the market can rise by 0.7% and Goldman can still claim it was right.

In any case, Goldman ends on a cautious note and warns that "while we do not believe this alone is a compelling reason to sell the market today (or buy VIX), we believe it is a trend worth monitoring closely."


Squid Viscous Mon, 11/13/2017 - 17:32 Permalink

something odd about Goldman, you have to be a jew to move up the ladder, even if you're one of the few non jews they hire...didn't they used to call that "discrimination"?

buzzsaw99 Mon, 11/13/2017 - 17:41 Permalink

which means that even a mere 90bps down day in the S&P could launch a self-reinforcing vol cascade which crushes the millions of vol sellers, unleashing a another sharp correction, or worse...admt it, michael snyder wrote that.  lol

Iconoclast421 Mon, 11/13/2017 - 17:42 Permalink

Market internals are getting pretty bad. 13 DOW components are downright fugly. It is interesting how this is completely invisible when just looking at the index. And the companies that are propping it up are a downright joke. Microsoft? Really? Windows 10 is a frickin disaster.

hola dos cola Iconoclast421 Mon, 11/13/2017 - 18:29 Permalink

Somebody must like the auto-stockorder-entry-recognition-direct-relay-2-algo-app in the next update. Selfinstalling ofcourse like the facial recognition app in the latest (not kidding, check it)On a more serious note (was not kidding though) the non-buy-and-hold money could be silently exiting the less liquid ones* obscured by the propping up of the liquid ones** on the premises they will be able to jump those when or just before the market smells the coffee and the slow money finds itself holding the propped up babies. Must be close then...?* helped by those appearing relatively cheap compared to the propped up ones.** or the to scandalize ones. 

In reply to by Iconoclast421

Albertarocks Mon, 11/13/2017 - 20:32 Permalink

Goldman is lying.  They know exactly what causes this phenomenon and they are just "playing stupid".  These conditions are part of what causes a Hindenburg Omen signal.  When conditions are ripe for a HO signal, this phenomenon should not be happening because without banker intervention a market correction of considerable size should occur, and usually does.  But this phenomenon is happening these days for the exact same reason the markets aren't tanking.  It's so freakin' simple, and it goes like this:When 90% of stocks are falling, Goldman gooses the markets to make sure the S&P index itself does not drop.  How do they do that?  By goosing the top 10 or 12 stocks.  The market caps for those handful of gigantic stocks is so huge that making sure they go up just 0.10% or so is enough to ensure the index does not drop.  Meanwhile, the rest of the stocks are like a bunch of smaller horses trying to pull the markets downhill, but to no avail.  The size of the movements on those smaller stocks are pretty big, but not big enough to overcome the effect of goosing a handful of the largest issues by just a tiny fraction.  They pull off the same shenanigans in the NASDAQ as well.  If anybody ever wondered why the FANG stocks seem invulnerable... now you know.They are lying through their teeth.  They know full well what is causing this phenomenon... they are."To each, his own caca smells sweet.  Do not be fooled by this." [Forrest Gump]