Volatility is likely to rise in the stock market in the coming days and weeks. Michael Cramer, founder of Mott Capital Management, writes:as the signs of stress pile up beneath the surface.
volatility index [VIX] It has been trading between 20 and 35 since the end of 2021, failing to reach the final blow that signals the stock’s bottoming process. But the stock market has surged since early October as investors once again dreamed of a dovish turn by the US Federal Reserve. These dreams came true in response to the Bank of England’s short-term purchases of government bonds to stabilize the gold market, and the Reserve Bank of Australia at a recent meeting reduced interest rates to 25 basis points (bps) instead of 50 basis points (bps). Decided to increase basis points (bps).
Despite the S&P 500’s surge, the VIX hasn’t fallen much. The S&P 500 has risen about 5% since the beginning of October, while the VIX has only risen from 31 to 29. market. For example, the 3-month EUR/JPY basis swap fell to its lowest level in a while, while the Markit CDX HY spread rose to his highest level since March 2020.
Additionally, the FRA OIS spread, which measures the difference between the 3-month Libor rate and the Fed Funds rate, has also surged. All of these indicators act as reasonable liquidity indicators. Typically, when these markets experience stress, equity volatility tends to persist.
(Quon Twin Sight)
Quant Insight data shows that real interest rates and corporate credit will be two of the most significant negative impacts on the S&P 500 in 2022, with one being clear: bond market volatility. is very high. ICE BofA [Move] Indices that measure bond market volatility have surged in 2022, but the VIX has lagged far behind. Interestingly, 2008 saw a similar event before the VIX finally spiked. Of course, that doesn’t mean the VIX has to go up, but the fact that bond market volatility is so high and equity market volatility is subdued doesn’t mean much.
(Bloomberg)
FX market stress
Moreover, when euro and yen basis swaps tend to have lower spikes, those spikes often coincide with increases in equity market implied volatility. This relationship may be due to broader market stress and lack of liquidity across financial markets.
(Bloomberg)
Credit spread widens
The Markit CDX High Yield spread has also recently increased to around 600, with spread changes historically associated with rising and falling implied volatility. Going back to 2012, 2015, 2016, 2018, 2020, etc., the VIX tends to rise when the CDX spread widens.
The obvious difference here is that if there is real stress in the system and investors are truly risk-averse, the CDX spread will rise and the VIX will rise with it. But in January 2018, he said, when the VIX exploded, the CDX spread was not rising. This shows that while the stock market is struggling, the bond market is not. This helps traders and investors discern the difference between a normal stock market correction and something perhaps radically different.
(Bloomberg)
Just as equities are rebounding wildly from their lows, so too are all the signs of stress appearing in the bond and currency markets. This has tricked investors into thinking the Fed’s pivot is coming, so you might wonder if the rally, which starts in October, is another ‘headfake’ by the market.
In fact, the credit and overnight funding markets are flashing bright yellow warning lights, while equities are ignoring the signal. This could mean that the market is very close to a big swing in volatility and the stock market is going down.
Chart used with permission of Bloomberg Finance LP. This report contains stand-alone commentary for informational and educational purposes only. Michael Kramer is a member of Mott Capital Management and Head of Investment Advisory. Mr. Kramer has no affiliation with this company and he does not serve on the board of directors of the affiliates issuing the shares. All opinions and analyzes expressed by Michael Kramer in this analysis or in any market report are solely those of Michael Kramer. Readers should not treat any opinion, view or forecast expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or to follow a particular strategy. Michael Cramer’s analysis is based on information and independent research that he believes to be reliable, but neither Michael Cramer nor Mott Capital Management guarantees its completeness or accuracy and does not should not be relied upon as such. Michael Kramer undertakes no obligation to update or correct any information presented in his analysis. Kramer’s statements, guidance and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantee any particular result or profit. You should be aware of the actual risk of loss by following the strategies and investment descriptions presented in this analysis. Any strategy or investment discussed may fluctuate in price or value. Any investment or strategy mentioned in this analysis may not be right for you. This material does not take into account your specific investment objectives, financial situation or needs and is not intended to be a proper recommendation. This analysis requires you to make your own investment or strategy decisions. Upon request, Advisor will provide a list of all recommendations made in the last 12 months. Before you act on any information in this analysis, you are strongly advised to seek advice from your own financial or investment advisor to consider its suitability for your circumstances and to determine the suitability of any investment. It is necessary to consider.
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