Societe Generale Cross Asset Research is talking Black Swans with the Dow, S&P 500 and Nasdaq all at or just off record highs.
A chart from the research firm assigns a risk percentage to various scenarios -- including political uncertainty (30%), sharp increase in bond yields (25%), a China hard landing (20%) and isolationism/trade wars (15%).
The list from the French investment banking giant doesn't include one-time events such as natural disasters, terrorism or a major hacking incident.
Some don't like the term Black Swan, so if there's a market correction event missing from Societe Generale's analysis add it to the comment stream.
In the days ahead of the election, volatility gauges are rising for stocks, bonds, currencies, and gold (oil too). Leading the way, though, are stocks, with the CBOE Volatility Index surging 70% in the eight days ended yesterday.
A Trump victory would lead to a wave of risk aversion, and the U.S. dollar would strengthen on the potential of a repatriation tax, RBC strategists say.
“The broader USD weakness of recent days is not what we would expect to see if Trump were to win the presidency.”
Firm says reaction will be more muted if Clinton wins. If Trump is quick to concede, it would likely renew risk appetite as well as prompt modest USD strength on the near certainty of a Fed rate hike in Dec. An inconclusive result or messy transition would keep investors on sidelines for longer; clear winners in that scenario are JPY and the volatility trade.
Volume on the iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA:VXX) Tuesday topped that of any company in the S&P 500 for the first time ever with 110M shares, according to Bloomberg. Bank of America was in second place at 89.3M shares.
Helping no doubt was the low price the ETF thanks to its bear market this year. It traded for north of $120 in February and goes for $40 now. The poor performance hasn't slowed demand for the product though, with inflows more than tripling the ETNs market value even as its underlying index plunged nearly 50%.
At a new 52-week low of 11.12, the VIX has tumbled more than 55% from its post-Brexit peak of 26.72 on June 27. The "fear gauge" hasn't closed higher for more than two straight days since its five-day winning streak in mid-June, and has just closed out a six-week losing streak.
Checking all the way back to 1990. Andrea Kramer at Schaeffer's finds this is just the fifth time the VIX has suffered a six-week stretch like this. The other four times, however, saw a decline in the VIX of just 31-36% vs. this 55% plunge. The S&P 500, meanwhile, has rallied 7.14% - the middle of the pack vs. the other four rallies.
The last six-week losing streak for the VIX was in August 2008, and the S&P 500 was lower by 3.9% two weeks later and 38.1% three months later, while the VIX nearly quadrupled.
Averaging the S&P returns from the last four VIX signals doesn't look pretty - down 10.37% three months later. Obviously, the 2008 example skews the results, and a sample size of four is simply too small to draw any hard conclusions.
Checking some other data, the CFTC reports speculator net short positions in the VIX have soared to 115K contracts - the most since 2013.
The AccuShares Spot CBOE VIX ETF Up Class Shares (Pending:VXUP) and Down Class Shares (Pending:VXDN) will open for trade tomorrow. The provider notes the ETFs' transparent pricing and and product architecture provide predictable cost of ownership, eliminating the asset complexities and term structure associated with other exchange-traded offerings.
VIX ETN investors in the last month have shifted from a "meaningful" short position to the largest net long position since 2012, says JPMorgan. "This shift in positioning was broad based and reflects both large new investment in long VIX ETNs.”
The number of shares in the Path S&P 500 VIX Short-Term Futures ETN (NYSEARCA:VXX), the VelocityShares Daily 2x VIX Short-Term ETN (NASDAQ:TVIX), and ProShares VIX Short-Term Futures ETF (NYSEARCA:VIXY) has doubled over the past five weeks, writes Chris Dieterich. It's tripled in the ProShares Ultra VIX Short-Term Futures ETF (NYSEARCA:UVXY).
At the same time, money is exiting those funds which profit when volatility shrinks, such as the XIV, where shares have fallen by half over that same time frame.
Three days of S&P 500 price swings exceeding 1.5% have sent the Volatility Index higher by 21% since October 6 to 18.8, a level not seen since February. It's got the technicians talking, and one says if this level of VIX resistance doesn't hold, the index is headed to 21, suggesting downside of another couple hundred S&P points (roughly 10%).
Ryan Detrick sees 1,905 as a key S&P level (vs.last night's 1,928 close) as that was the August level from which the index bounced. With the small caps already having broken through a number of key support lines, it would be nice to see the big caps hold.
The rise in volatility actually only seems troubling to those induced by the central bank-induced lull of the past few years. "Volatility coming back into the market is a direct correlation to the tapering ending," says one wise trader. "This is what it used to be like before the government was in the market.”