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SurlyTrader is a portfolio manager at a large financial institution who specializes in trading derivatives. He has been in the financial services industry for over a decade and would like to share his experience and enthusiasm in the financial markets with those who have a natural curiosity and... More
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  • Risk Flare Ignited 2 comments
    Apr 15, 2013 7:37 PM | about stocks: SPY, GLD, SLV, PPLT, OIL, VXX, VXZ

    Investors often explain to me that volatility should be very low because of the abundance of liquidity in the markets which is directly due to easy monetary policy across the globe. My immediate response is that the liquidity is there in abundance until it is gone. Long dead are the days when human market makers begrudgingly bought into sharp down-drafts in risk assets in order to provide liquidity. In the "modern" financial arena, you can hear a pin drop on the bid side of the order book when a sharp correction occurs.

    It only takes one day for the market to change its mind. There are three rather noticeable dislocations in asset classes.

    1) VIX

    Today we experienced a 43.2% increase in the VIX. This is in the 99.93 percentile since its inception in 1990:

    Graphically we can see that the change has limited company:

    (click to enlarge)

    2) Oil

    The downward spiral in crude prices over the last two days pales in comparison to the jump up in the VIX. The two-day move of -5% only gets into the top 95th percentile of observations since 1983:

    (click to enlarge)

    3) Precious Metals

    Anyone levered and long in the precious metals space is crying uncle. Gold sold off like a banshee over the last few days and even gave bitcoin a run for her money:

    (click to enlarge)

    Just how bad was the two day 13.67% drop in Gold? Beat out the VIX at the 99.98 percentile since the beginning of 1975:

    It never seems that this kind of volatility happens in isolation. Therefore we might just be in for an interesting spring and summer...

    From the S&P 500's standpoint, the trend was broken and there is little support remaining. 1550 might be bounce, the 50 day moving average at 1540 as well, but it seems like 1525 is in the gun sites:

    (click to enlarge)

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Stocks: SPY, GLD, SLV, PPLT, OIL, VXX, VXZ
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Comments (2)
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  • Nitin Gulati
    , contributor
    Comments (499) | Send Message
    But we should also put into perspective that 1.90% move down in SPX on Feb25 , led to spike to 4.9 vol points to 30 day Implied Volatility. But today with a SPX drop of more than 2.5 %, 30 day implied vol rose only by 4.4 points. That to me reflects less vega covering and market not pricing more risks in future.
    16 Apr 2013, 01:45 AM Reply Like
  • Surly Trader
    , contributor
    Comments (66) | Send Message
    Author’s reply » I agree with you about putting things into perspective. The move in the VIX by itself is not entirely disconcerting,especially given its low starting level, but the move in commodities will definitely have some reverberation across the markets. We will see how this week plays we are happy again.
    16 Apr 2013, 10:29 AM Reply Like
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