On an aside: This article was shared by Jeffrey Carter (recent Board member of the Chicago Mercantile Exchange).
It didn't take long for the recent good times to end. This was part of the précis of our past article, concerning how volatility -particularly in recent years- has been transitioning very rapidly: from one decile, to a neighboring decile. And as suggested in that article, we bore witness to this phenomenon yet again today.
It didn't take long for the recent good times to end. This was part of the précis of our past article, concerning how volatility -particularly in recent years- has been transitioning very rapidly: from one decile, to a neighboring decile. And as suggested in that article, we bore witness to this phenomenon yet again today.
Even a year ago (at about this time), as market volatility stayed suppressed for a lengthy duration, there was frequent, brief outbursts of market risk. Not the full blown corrections, nor the later charming but erroneous 5% ones you hear about incessantly from witless "professionals". Only a few percent each. To be a bottom decile volatility, or about where we closed a week ago on July 16, you must close below ~12½ percent. We use this round value going forward for illustration.
And if you are in the bottom decile, then there is -of course- only one way to head from there. That is, transition up to the second (or in a small number of cases even higher) decile. Our research showed that in the past year that this transition normally occurs within just several days! So then on Thursday July 16, some readers' commentary had knowledgeably made notice of this. Suggesting that volatility would fall and markets would stay positive, until falling sometime late this week. We reference these readers' comments through the bottom of this article. And for those lucky individuals, who traded on such insight, today should have capped a perfect trade.
And if you are in the bottom decile, then there is -of course- only one way to head from there. That is, transition up to the second (or in a small number of cases even higher) decile. Our research showed that in the past year that this transition normally occurs within just several days! So then on Thursday July 16, some readers' commentary had knowledgeably made notice of this. Suggesting that volatility would fall and markets would stay positive, until falling sometime late this week. We reference these readers' comments through the bottom of this article. And for those lucky individuals, who traded on such insight, today should have capped a perfect trade.
However it is worth noting that there is harsh risk involved in using such market insight for short-term trading. Our externally published research shows overwhelming evidence that very few (to repeat: very few but for banks, up until the 2008-2009 financial crisis) would be able to skillfully profit, over time, by treating the markets like some sort of highbrow casino. And leveraged volatility products can be baleful even here (notice that notwithstanding three consecutive negative market days, the VXX generated another record low today - a feat it also accomplished multiple times this week!) This reflects the frequent changes up and down in volatility deciles, throughout any week.
The pattern of making bottom decile volatility has happened more frequently than usual recently. We do not expect that this will be the case in the coming year. Below we see how quickly volatility bumped out of the bottom decile, every time it was in the bottom decile over the past 12 months (prior to last week which we discuss further below):
- June 23, 2015 (within 1 day)
- May 21, 2015 (within 2 days)
- May 15, 2015 (within 1 day)
- April 28, 2015 (within 1 day)
- April 23, 2015 (within 2 days)
- December 4, 2014 (within 3 days)
- November 25, 2014 (within 2 days)
- September 18, 2014 (within 2 days)
- September 5, 2014 (within 1 day)
- August 18, 2014 (within 12 days)
- August 14, 2014 (within 1 day)
- July 22, 2014 (within 3 days)
- July 18, 2014 (within 1 day)
- July 11, 2014 (within 4 days)
What do we notice? Firstly, that these quick moves in and out of risk, in the midst of a very frothy market, has been too frequent (at 14 times in the prior year, or about once every several weeks!) Secondly, the lengthiest duration of these 14 times was 12 days (that was 11 months ago); everything else was at about 3 days! A little less, still, versus the lengthier historic average. Even with a surfeit of news and market insights, none matches up to only these dates above (here, here). And as we noted numerously in our prior article, one often doesn't have much time to profitably execute against a risk-on trading strategy.
And things also appear to be slowing down slightly, so we might expect (per our previous article) that these patterns may dissipate next year. Meanwhile today we can now append July 16 to the complete list above. And while it would be on the higher side of the distribution shown, at one week, the visit to the bottom volatility decile again certainly turned around very quickly (as will the next turn, and so on).
On an aside: this blog's followers have helped attain nearly one million views on Google+ alone (where you can also follow us if not directly from this site). More on this success, next month. Additionally our previous article -Volatility in motion- was both Top News on Zero Hedge,
and front page of the highest-ever rated articles on Quantocracy. Also nicely featured on the Saturday study session by Lindzon's StockTwits.
No comments:
Post a Comment