More Market Pain: The VIX, Swaption Vol, EMFX And Some Investing Philosophy


The Market: “Good morning!! How was the long weekend?”
Trader: “Great I guess, party at the in-laws. How ‘bout you?”
The Market: “I spent the last 72 hours furthering my plans to cause you more pain.”
Trader: “Really...Why?”
The Market: “Bwaahhhhhhaaaaa….assume the position!!”

We can get into the cycle of looking for where the next bounce is going to come from, or if this is the second inning of a larger market collapse. What seems clear to me is that this is what we can expect from the market--far greater swings and moves on lesser news. That is an indication that liquidity is drying up and there isn’t new money coming in to chase valuations higher. The high valuations and tight credit spreads that practically every market commentator highlighted in 2017 are finally taking their toll.

Don’t take my word for it, take a look at the 5yr chat on the VIX.

I can name from memory each of the events that are north of current levels. That’s not showing off my grasp on market history--it is an illustration of the fact that they were all *big* events. Or just *events”. They had a name. They had a story.

This market seems like just the opposite. It is a selloff looking for a story. Is it anxiety over tech? Is it fear about the impact of a trade war?  Or...is there just nobody on the bid anymore?

My money is on the latter….yet what continues to befuddle me is the lack of movement or realized volatility in other asset classes. This is a regression of the vix against 3m/10yr swaption volatility.

Quite frankly it is a pretty worthless regression analysis but I wanted to pull up a chart that illustrates just how low interest rate volatility is compared to equity volatility.

There are also those that are looking for a USD to move higher as market stress increases. These two factors are probably two sides of the same coin. I went over some of the factors driving CAD and AUD last week. JPY has also traded by its own twisted logic...strengthening earlier this year on the back of of optimism about global manufacturing demand, local growth, and BoJ stealth tapering--and then as market stress increases, which has usually put a bid into the yen, it simply does nothing.

What about the spicy stuff...high-beta EMFX? Surely the high risk/high carry currencies have sold off?

Meh….not really. TRY has its own problems...if we throw that one out, the big “loser” in this chart is BRL at -1.5% YTD….a loss in the spot price you made up in carry!

FTQ assets like treasuries aren’t rallying...rate vol isn’t moving much...and EMFX is showing unseasonable warmth. The rest of the picture isn’t quite adding up to me--at these levels I’d lean towards some combination of these assets--like buying receiver swaptions and selling EMFX as a better expression of a bearish view than simply selling stocks.

On a more philosophical note, over the weekend I came across the excellent “Behavioural Investment” blog. It is a succinct, well-written set of posts on various investing issues that animate me--like cognitive biases, misplaced incentives, and the perils of generating alpha. The most recent post was entitled, “Things That Fund Managers Don’t Say Enough.”

Here are a few of my favorites, with my editorial comments in italics:
 
“It was a genuine mistake – our analysis was incorrect, but I will make sure I learn from this for future decisions.”  CIOs don’t appreciate this level of humility from the PMs. Most would respond with “And next time I’ll make sure to hire someone that isn’t learning on my dime.”

“Although the trade was profitable, the situation did not develop as I had imagined and its success was actually just a dose of good fortune” I always appreciated the bloomberg header of a good friend…”Better lucky than good!” There’s a guy that fears nothing.

“I appreciate that recent market volatility feels significant, but I don’t want to focus on it because, on a ten year view, it is likely to seem meaningless”.  More PMs would be willing to say this if they had a ten year lockup on their investors’ money.

“I appreciate that I previously held a high level of confidence in this view, but, after careful analysis of new evidence, I realised that I was wrong”. There are dissertations to be written about this one...if you’re hired to manage money you’re self-selecting as smarter than the market--so when the market shows you that you’re wrong, it is hard to admit….because some important people think you’re smarter than the market!!  How often do you see a professional athletes publicly admit they got worked by the competition? Pedro Martinez once said the Yankees treated him like they were “his Daddy,” and he literally never heard the end it.

The lesson: know what you’re good at, stick to it. Stay humble, and don’t be afraid to admit mistakes within that circle of competence. And while there is good reason to stray outside of that circle from time to time--don’t allow you’re mistakes (and thus by definition, you’re successes) there to be big enough to have to be explained to someone more important that you.

Shawn
TeamMacroMan2@gmail.com

@EMInflationista

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57 comments

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Skr
admin
April 3, 2018 at 2:58 PM ×

Shawn, please add "if no else is thinking what I'm thinking then I'm probably wrong(or early).

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Gus
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April 3, 2018 at 3:45 PM ×

A recent quote from last week:

"Plainly, we did not think the February lows would be retested. Obviously, we were wrong, and in this business when you are wrong you say you are wrong and you need to be wrong quickly for a de minimis loss of capital."

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Skr
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April 3, 2018 at 5:27 PM ×

Word of the day 'resonate'
How about we wait till Friday? After all there's only so many Congnac filled Easter egg half shells one can take. Yep let's do Friday.

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Skr
admin
April 3, 2018 at 7:30 PM ×

Shawn, what is this SOFR?

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Leftback
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April 3, 2018 at 7:59 PM ×

Just for now, it's a snoozefest today, Mr Market considering whether the support level of the 200DMA is to be reinstated or discarded at ~ SPX 2590 cash. If it holds (and there was a bounce off 2580 just now) then the danger of a face-ripping flesh tearing rip-snorter sometime this week seems to be growing. Volatility considerations support this:

https://confoundedinterest.net/2018/04/03/vol-of-vol-latest-bout-of-volatility-sends-vvix-to-two-year-low-to-vix/

Usually a low in VVIX/VIX ratio, and a spike in put/call coincides with equity jocks donning their rally caps.

We are inclined to leave equities to meander for now - and instead to fade the recent enthusiasm for Treasuries, with auctions next week and the employment data directly ahead of us. Let's wait and see where equities have arrived by Thursday's close.

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johno
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April 3, 2018 at 8:10 PM ×

Nice call on USDJPY yesterday, IPA.

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IPA
admin
April 3, 2018 at 8:29 PM ×

Thanks johno! It's going higher still, will be buying pullbacks.

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Shawn
admin
April 3, 2018 at 8:35 PM ×

SOFR = So Far So Good!! This is the secured overnight funding rate that the fed started publishing today. SOFR was established by AARC to replace LIBOR, and has nothing to do with LSAP, TLAC, IOER, and certainly not EFSF, LTRO, SMP, ELM, or OMT.

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IPA
admin
April 3, 2018 at 9:50 PM ×

Bro, we never learned this on CNBC. They just tell us to buy the dip in spooz and wait for the man wearing the hat with horns to tell us when to sell.

Speaking of...US equities are nearing a break of a steep down trendline. This usually results in a violent move higher.

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Anonymous
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April 3, 2018 at 10:20 PM ×

Once again, my decision to cover shorts proved correct as US equities rallied today.

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Anonymous
admin
April 3, 2018 at 10:24 PM ×

Read today that Einhorn lost money on both longs and shorts in Q1. IPA/johno - were you managing his trades by any chance? LOL

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IPA
admin
April 3, 2018 at 10:59 PM ×

BS, I simply have no time for you any more. You are free to roam unnoticed by me from here on. Just one advice, if I may, try to sound less smart and don't say that you are always correct, you may actually gain some respect. Too late for that here, and I doubt you are capable of admitting your mistakes. Takes years to learn that skill of humility. Take care, kid.

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johno
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April 3, 2018 at 11:33 PM ×

BS -- blah blah blah

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Unknown
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April 3, 2018 at 11:46 PM ×

this is some low level trolling.

Market feels schizoid and bearish. Vol (ie medium term VIX) increasing but still too low. I expect loss of USD liquidity on higher rates and USD aversion has a lot lot more to run for US assets this year. But tomorrow I have no idea. A lot of stocks that could completely reprice (lower) but not quite ready to.

Cryptos - drip drip driping as every day miners cash their chunk out of millenial's favourite Ponzi. Still needs to decline another 60% before people lose interest.

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friendoshawn
admin
April 4, 2018 at 1:56 AM ×

Weirdest environment I've seen in a long time. NQ futs are traveling miles back and forth on 2-5 contracts on a side. ES, rates and credit are trying to keep up literally tick by tick and getting whipsawed like there's no tommorrow. Then dead silence for hours before going through the same exercise. Volumes seem miniscule, and I have to believe algos are getting chopped hard.

Experience suggests this can't last long. Facebook is not a bank, not Mex CDS and very much not a currency. What people need is a few calm (<2% up or down) days before they start to chase risk and decorrelate. Today was day 1, and we even got thru a Trump presser without falling apart. My bet is 2550 holds and traffic starts moving again.

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Leftback
admin
April 4, 2018 at 3:31 AM ×

Today was a very low volume day, for sure. Not a lot of conviction out there at the moment. Many people, including several here, don't like to do much ahead of "major data points" like jobs data, or into FOMC meetings. There will be easier days ahead.

Technically there is no reason for 2550 to form a strong support level, other than, you know, it's there. The case for a trip down to 2532 is strong, but that doesn't mean it will happen during this round.

Bear markets often have intense periods of selling that exhaust themselves and are interrupted by surprisingly sharp rallies. A trip up to the 50 day MA at 2721 wouldn't be out of the question.

The FANGs are broken, but they can be patched up and sent back into the ring again. This risk-off panic is probably over, and we are probably going back to a week or two of worries about higher rates, expect more chatter about Risk Parity etc… .

[The 4th dot was for Skr]

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Cbus20122
admin
April 4, 2018 at 5:49 AM ×

https://www.businessinsider.com.au/housing-sales-turnover-australia-2018-4

Aussie home sales tanking.

Not a good sign for Canadian home prices and China's bubble.

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Anon
admin
April 4, 2018 at 7:30 AM ×

Shawn - any chance we can have stupid comments (like johno's "blah blah blah") removed?

johno IPA etc acting like juveniles recently. If we're gonna have trolling lets have some amusing insults - this is just tedious. Thx.

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johno
admin
April 4, 2018 at 10:10 AM ×

Anon, I'm not on here to waste my time reading what you call the "amusing" insults of trolls or spending any time beyond writing "blah blah blah" in response. I'm glad my blah blah blah is a letdown to you. Instead of whining like a baby and complaining, try contributing.

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IPA
admin
April 4, 2018 at 11:53 AM ×

Thank God you don't comment actively! Besides, one can skip comments he doesn't want to read. You are welcome to skip mine. Not sure what upset you, but I have mostly been writing about the stuff I trade and only occasionally about children behaving badly. What have you written about lately?

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Anonymous
admin
April 4, 2018 at 12:18 PM ×

IPA/johno -- blah blah blah

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Doug
admin
April 4, 2018 at 1:39 PM ×

Hey admins, if you do want to block the trolls - it's easily done:

https://codex.wordpress.org/Combating_Comment_Spam#Comment_Blacklist

Really enjoying the content and (most) comments on here.

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checkmate
admin
April 4, 2018 at 2:19 PM ×

For clarity I was running and adding to a short FTSE position since , long enough for just about everybody to get bored and stop listening). It was well offside for ,you got it, longer than people could stay interested. Back onside I opted to add to that position based not on price levels ,but on expiry of the 1st quarter. Target ,not a price level, but a timeframe that UK market risk topped back at 7700+ and we will run for a minimum of a year from that event and I would expect to continue selling rallies until well into the 1st quarter of 2019.
The underlying theme remains one prompted by valuations and subsequently reinforced by political risks.
I thought it might be useful to put this out there because this is a macro site and frankly I get confused on occasion by the timeframes taken which to me don't really correlate with a macro view. I have no idea for example who Nico is or what his portfolio looks like ,but I have found myself sympathetic to his position of having to be derided because he isn't currently on the rightside of what is supposed to be a macro/thematic position. Over the years I've been there so often I start to worry when too many people seem to agree with me. So, back to the markets.

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April 4, 2018 at 2:35 PM ×

IPA/Johno,

It takes about 30 seconds on Blogger to change your posting name from “Buy Stocks” to “Anon” and back again.

The best approach is to just consider the source of the comments and ignore the troll(s)

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Nico G
admin
April 4, 2018 at 2:59 PM ×

i appreciate that checkmate

The only trading truth im left with is that your entry does not really matter, only the exit. But the margin calls last January were the worst in 22 years of punting. Even if still underwater in spoos i am completely breathing and feel in trend.

i shorted after Trump elections knowing he would go on a trade war (the guy was obsessed with China for as long as i could remember) + a hawkish Fed but market chose to look the other way (tax cut etc). After 18 months of wrong direction to nosebleed multiples it will take a lot to reprice to current world environment

technically charts look like a nightmare. There is nothing until 2200 on spoos, 2440 ain't relevant at all

likewise, it will take a lot of repricing in UK assets (stocks REITs properties everything) to factor in Brexit, if a worldwide recession was not enough of a problem. Happy trailing.

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April 4, 2018 at 3:21 PM ×

I would also add that we can ignore the likes of "checkmate" and "Nico" who are simply trading without risk limits and clearly have no knowledge of macro.

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Leftback
admin
April 4, 2018 at 3:48 PM ×

5 minute macro. Tedious. Choppy markets. Incomplete moves. Seems to encourage time wasting and name calling.

Spoos scuffling around again in the area of the 200DMA. Treasuries are bid, but not seriously. Markets churning, waiting for direction. Options traders would have to be on an even shorter timescale. Better still, don't trade at all until this resolves.

Can't shake the feeling that there is one more sizable dump ahead - with a final spike in fear and safe haven buying (yen, USTs), to be followed by the inevitable bear market relief rally, aka the face-ripper.

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Anonymous
admin
April 4, 2018 at 4:34 PM ×

And just like that, equity indexes reverse overnight falls. Once again buying stocks wins the day!

Leftback, you may be annoyed that you can't find anything to trade but a 1000+ pt round trip in the Dow in a few hours should provide opportunity for any serious trader.

PS Watch & learn johno/IPA, even you might make some money one day...

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IPA
admin
April 4, 2018 at 4:35 PM ×

@LB, totally agree on the culprit of current tensions here. As Shawn correctly pointed out, the regime has changed. So what used to be an environment where a brainless monkey could make money is now a very hard process of dare I say thinking. So what used to take just a few days for these animals to come here and tell us what we had to do 48 hrs ago now takes them two weeks to digest. Finally have to educate themselves on what markets do most of the time - decimate 95% of the traders.

I am a bit in disagreement with you on Yen. In the last week or so, it has disconnected from risk off, at least in the magnitude it has always been in the past. Truly a head scratcher for some but for me has been somewhat of a newly found theme to trade and exploit while it's working. There is something else that is bothering yen longs and I think it's chasing them out. It can't rally longer than a few hrs even on risk off days like today.

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Anonymous
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April 4, 2018 at 4:41 PM ×

@IPA - I reckon you'd know all about markets decimating traders.

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checkmate
admin
April 4, 2018 at 5:19 PM ×

Great Unknown,
I have no issue with being ignored, derided, insulted ad infinitum by people I know nothing about. If I did know you and I also respected your knowledge/experience then that would be different. Until then though please just ... in the wind to your hearts content.

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April 4, 2018 at 5:32 PM ×

Guys,

He hijacked ny posting name. It’s that idiot Buy Stocks at work again

Looks like the only way to get rid of him is to block his IP address.

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April 4, 2018 at 5:37 PM ×

In the meantime, if you see any postings from any posters under any name that are derogatory in anyway, just know that’s it’s our troll trying to stir up hate and discontent..

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IPA
admin
April 4, 2018 at 5:46 PM ×

I think most people here are very knowledgeable about things they discuss. I have deep respect for both @checkmate and @Nico G even though I may find myself on the other side of their trade. We have had numerous civil discussions and I am looking forward to many more! This being said, there is no dogma in making money in the market that is undergoing a change. One could change with it or be periled trying the insanity technique of doing the same thing over and over again and expecting a different result. That goes back to my brainless monkey reference, so appropriately answered by the one who obviously considers himself one ;)

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Cbus20122
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April 4, 2018 at 6:41 PM ×

For anyone who may have noticed, the 200 day MA is clearly support from SPX, but there is also a downward trading channel in QQQ that has held pretty well so far. It just hit the ceiling of that around noon today and then reversed. I think if we see a "face ripper", it will come from this channel being definitively broken. Eventually, we will be at a point where it either breaks the top of this downside channel, or definitively breaks below the 200 day MA. That's what I'm using as my guideposts right now. Until then, staying bearish long term, market neutral short term.

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April 4, 2018 at 7:03 PM ×

I think the stupid comments by johno and IPA earlier must also be Buy Stocks in disguise..

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Cbus20122
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April 4, 2018 at 7:13 PM ×

And QQQ testing top of that downward channel right now again. Watch what happens here.

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johno
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April 4, 2018 at 7:22 PM ×

Cbus20122 -- Thanks for the hindsight analysis. Maybe you can let us know whether you're long or short 48 hours after the event like Buy Stocks does.

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IPA
admin
April 4, 2018 at 7:25 PM ×

@Cbus, good eye! I alluded to that steep downward trendline last night @ 9:50pm. Also, connect 6/27/16 and 12/2/16 lows on QQQ to form a support trendline that the price held and bounced from on 2/9/18 and on the last three days.

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johno
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April 4, 2018 at 8:11 PM ×

Obviously, that was not me posting at 7:22 PM, Cbus20122. Someone is going to a lot of trouble disturb this thread.

BS -- blah blah blah

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johno
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April 4, 2018 at 8:13 PM ×

BS -- blah blah blah

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johno
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April 4, 2018 at 8:14 PM ×

BS -- blah blah blah

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johno
admin
April 4, 2018 at 8:14 PM ×

BS -- blah blah blah

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johno
admin
April 4, 2018 at 8:15 PM ×

BS -- blah blah blah

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johno
admin
April 4, 2018 at 8:15 PM ×

BS -- blah blah blah

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johno
admin
April 4, 2018 at 8:17 PM ×

And those separate posts weren't mine either.

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johno
admin
April 4, 2018 at 8:21 PM ×

Guys, none of the posts here today are actually from me.

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Shawn
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April 4, 2018 at 8:24 PM ×

good grief people, impersonating other commenters? Really? That's just sad.

You guys aren't siblings. There's no prize for getting in the last word or one-upping someone.

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Cbus20122
admin
April 4, 2018 at 8:26 PM ×

lol. I just ignore any of the troll-like commentary on here. Others here would be wise not to take the troll bait. Keep your ego out of this (just like you should do for trading / investing as a whole).

I do come here for the great commentary however. Great way to learn things and get real insights, even if some of those insights are wrong or different from my own.

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Cbus20122
admin
April 4, 2018 at 8:48 PM ×

Also, there is a separate downtrend line that may provide resistance around 160 for QQQ. This may be more of the "true" top channel trend line now that I look at it closer. This aligns more accurately as a parallel with the bottom of the channel.

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Anonymous
admin
April 4, 2018 at 8:58 PM ×

Dow up almost +1000 pts on the day. Correct timing on:
- My covering of tactical shorts (end of Monday)
- My long call off US open (today)

I don't wanna say "I told you so" but I told you so.

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Anonymous
admin
April 4, 2018 at 9:04 PM ×

I notice some of my previous posts have been deleted. For the trolls, here's your chance to once again say I'm making hindsight calls - enjoy!

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Cbus20122
admin
April 4, 2018 at 9:59 PM ×

So finally, QQQ hit the top line of the channel and promptly reversed a slight bit right at the end of the day. Sits just below it waiting for a swing one way or the next tomorrow. Needless to say, tomorrow will be interesting from a directional perspective, and will likely lead to a breakout from a technical perspective one way or another.

See chart here: https://imgur.com/a/N27aZ

Notice the long-term trendline that it bounced off (that IPA brought up) below, and the top line of the descending channel above.

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