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Risk Flare Ignited

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:

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:

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:

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:

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Continuing the Discussion

  1. Tuesday links: you play like you practice - Abnormal Returns | Abnormal Returns linked to this post on April 16, 2013

    […] Risk has once again flared in the markets.  (SurlyTrader) […]

  2. Where is the Vol? | peoples trust toronto linked to this post on May 8, 2013

    […] What is fun to notice in this all-time high flying market is that the 20 day trailing volatility is 15.6% while the 10 day is 9.8% and the 50-100 day are 11-12%.  So basically the VIX is telling you that the little risk flare a few weeks back was nothing but a fluke: […]



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