The 'Other' Fear Index Just Flashed "Panic"

As the world held its breath, in November 2016, for President Trump's election, we noted that equity market implied correlation is flashing a 'panic' warning according to BMO quant Mark Steele as the little-known derivative indicator suggests traders fear a major 'high correlation' event and are aggressively hedging systemic risk.

And now, amid the massive unwind of the Short-Vol trade, implied correlation - the other fear index - is flashing red, as Bloomberg notes, the wild market fluctuations of recent days are sending bets for equity correlations to levels not seen since before the election (and Brexit).

Out of 505 S&P 500 Index stocks, a record 503 fell on Monday as the gauge experienced its worst decline since August 2011, and options markets are suggesting that extreme co-movement is likely to continue...

As a reminder, implied correlation measures the relative demand for macro overlays (index hedges) vs micro risk (individual stock hedges/concerns). The higher it is, the more systemically worried investors are and the more traders believe a high correlation 'event' is due (typically the high correlation event is a big downturn in stocks).

While VIX is well off its overnight '50' highs, volatility expectations have certainly returned to global financial markets, with a Bank of America Merrill Lynch measure of risk across asset classes jumping to its highest level since April.

(The Market Risk indicator is a measure of future price swings implied by option markets in global equities, rates, currencies and commodities.  Levels greater/less than 0 indicate more/less stress than is normal. )

Going back to what BMO's Steele concluded in the run-up top the election in Nov 2016, just as we saw with Brexit, a rebound in sentiment "can be just as ferocious, and that carries the day for broad equity markets," seemingly suggesting to buy the dip as he notes there's "no sign of a banking system threat" that pressures equities systemically.

That may be what investors are thinking today with its XIV-pulled ramp, but one thing is different from Nov 2016 - central bank balance sheets are expected to shrink and rates are normalizing...


evoila Potato Farmer Thu, 02/08/2018 - 13:35 Permalink

You want to know why the market is taking. It's because the USAF is calling up every single air force pilot they have. Even the reserves. Every. single. one. 

Don't believe me. Do some investigation, ask the tough questions of the USAF, and you will see that NoKo is probably going to get whacked very soon.

The smart money is bailing hard, and you're all standing around holding your members in your hands talking about interest rates.

In reply to by Potato Farmer

GotGalt Peak Finance Thu, 02/08/2018 - 14:38 Permalink

Powell has to be careful what he chooses to do.  It's not just about stock market but protecting $US status as global reserve currency.  Petro dollars coming home to roost.  Inflation starting to take hold.  Fed cannot be too far behind the curve, because that road leads to chaos as well.  Sometimes stocks have to be sacrificed to keep the other important plates spinning.  I sense a few more rate rises, continued gradual selling off of Fed balance sheet, and stocks undergo a true 20% bear market correction 

In reply to by Peak Finance

Dragon HAwk Thu, 02/08/2018 - 13:27 Permalink

All this hanging around on Zero Hedge is starting to pay Off,  these are the days we have been Waiting for.

  MSM will be stopping in for some Fear Porn Headline Ideas, shortly.

BraceforImpact Thu, 02/08/2018 - 13:29 Permalink

Pull the MFING PIN and let it go.


Sick of waiting while knowing it's mathematically going to happen, just do it so I don't have put up with delusional people thinking everything is great

eclectic syncretist Algo Rhythm Thu, 02/08/2018 - 15:32 Permalink

The Fed puppets came out and said this drop ain't shit, and doesn't change their plans to keep hiking rates one bit, which is a green light to sell, sell, sell, then sit back and do nothing until such time as they see fit to change their minds.……

In reply to by Algo Rhythm

Anonymous (not verified) Thu, 02/08/2018 - 13:37 Permalink

The time of great unwinding is upon us ...

A time of war and violence ...

A time of false-flags ...

A time of man making a meal of his neighbor, feeding upon his flesh and gnawing on his bones ...

(good times)

TheWholeYearInn Thu, 02/08/2018 - 13:40 Permalink

" implied correlation measures the relative demand for macro overlays (index hedges) vs micro risk (individual stock hedges/concerns). "


And that, folks, is why they get paid the BIG SHECKELS to tell you what to do with your hard earned money...


The more it sounds like they're looking down on you which phrases that sound like Romulan phonetics, the bigger the rip off artist they are.

Seasmoke Thu, 02/08/2018 - 14:07 Permalink

Hey the Olympics start tonight. And in Korea. Damn. These guys are good. How do they do it. How do they know so far ahead of time. I'm impressed. 

SillyWabbits Thu, 02/08/2018 - 15:08 Permalink

I'm not worried because I understand derivatives and all possible outcomes on all counterparties in addition to everything the FED can and will do.

No problem.

Herdee Thu, 02/08/2018 - 21:08 Permalink

Normalizing interest rates is part of the present monetary experiment. It's going nowhere fast. Rates will come back down to 2% this year. QE 4 is coming don't forget, they're staying at The Roach Motel. That's what will be the confirmation needed that only hyperinflation and declining interest rates are the only way out until she busts into a huge supernova explosion. Think Weimar Germany.

Let it Go Thu, 02/08/2018 - 23:46 Permalink

Fear is a big factor in markets like these. What we are witnessing qualifies as a "blowoff top." Markets are emotional and just how deep this pullback or correction will become is still unknown. Clearly, many traders have been caught sideways and been dealt a solid blow.

History shows that when markets have indeed started a long-expected selloff it is not uncommon to see attitudes towards where to invest turn on a dime. The article below delves into some of the factors playing into current market actions.

 http://Is It Too Early To Call A Market Top?.html