Tag Archives: volatility

paris risk

Financial Markets Ignore Paris Terrorism-At Their Own Risk

Weekend’s Geopolitical Events Are Being Ignored..

MarketsMuse curators have been navigating commentary across the media throughout the weekend in search for the various financial industry pundits and opinionators who might add some context to the terrorism that shook Paris on Friday night. No surprise, we noticed the below opening from hot-off-the-press a.m. commentary from global macro advisory Rareview Macro via their institutional newsletter “Sight Beyond Sight”..

Neil Azous, Rareview Macro
Neil Azous, Rareview Macro

Israeli equities are showing the largest positive risk-adjusted return across regions and assets. Crude Oil is -3% off the overnight highs and now trading flat-to-negative. So what is behind that? One argument is that these asset markets are positively responding to the deal made over the weekend on how to end Syria’s civil war and the adopted timeline that will let opposition groups help draft a constitution and elect a new government by 2017.

A lot of professionals want to believe that the US equity market is also technically oversold. Combine that with some of the global solidarity sketched out above in response to the weekend events in France and the view is that there will be more stability rather than higher volatility today in risk assets.

If you believe that, we have land for sale in Fallujah, Iraq and it’s at half price today. 

For the full analysis expressed by Rareview Macro’s Sight Beyond Sight, please click here

Volatility is the New Asset Class-How To Harvest

MarketsMuse Strike Price curators are always looking for smart perspectives on how to bring more asset managers and institutional investors to better understand and embrace the use of options in a responsible manner. According to Todd Hawthorne,  lead portfolio manager of Boston Partners, volatility [which some immediately and sometimes, misguidedly associate with the CBOE VIX Index], has created a new asset class for institutional and retail investors, and like all other asset classes, there are opportunities to harvest returns. In this case, the tools to implement volatility strategies are found via the use of options contracts.

Todd Hawthorne, Boston Partners
Todd Hawthorne, Boston Partners

In a recent submission to Pensions & Investments, Hawthorne writes, “These volatility strategies, when viewed as their own discrete asset class, are designed with the goal of delivering returns that are in line with historical assumptions for equities while maintaining a far narrower range of performance (i.e., a substantially higher Sharpe ratio) and downside protection that can limit losses. Moreover, in a market in which yield has become difficult to find, the construct of equity buy/writes, coupled with bottom-up fundamental analysis, can create a synthetic yield instrument that delivers uncorrelated returns and manages to capitalize on volatility rather than being subjected to it.”

Adds Hawthorne, “Traditionally, when retail investors discuss “low volatility” strategies, they are referring to an approach that combines diversification with systematic and regular rebalancing. These more traditional approaches — be it Shannon’s Demon, the Kelly Criterion, or other variations — are more about circumventing volatility than actually capitalizing on it with true downside protection and improved return profiles…

However, other strategies that combine both equities and equity call options — or buy/write securities — can more effectively “harvest” returns out of swings in sentiment, while providing more predictable, and often better, performance even as volatility ramps up. The concept of creating synthetic yield isn’t necessarily new, as portfolio managers will often invest in buy/writes on a basket of stocks tied to an index as a way to generate returns that are in line with the market over time, but at slightly reduced volatility and with the added benefit of options income..”

To read the entire P&I article, please click here

Wanted: Fed-Watching Pundits: Requirement: Coin-Tossing Skills

MarketsMuse editors were relieved yesterday after the Fed announcement for two reasons; the first being we were reminded that at least half of Wall Street’s Fed-watching pundits who get paid big bucks to predict events can be replaced by anyone who can flip a coin, as half of the pundits were wrong and arguably, at least half of those who were right, were probably right for the wrong reasons. One would need to have a transcript of the entire meeting to know what those Fed governors were thinking and saying.

The second relief comes from having watched a post-announcement color commentary on CNBC “Fed Winners and Losers”..which had sober and well-thought out thoughts from Rareview Macro’s Neil Azous and SocGen’s Larry McDonald


Equities Options Marts Bustling: 1 Billion Contracts Trade in Q3

tradersmag  Trading in equities options is enjoying a resurgence, thanks to recent volatility in underlying cash markets, a burst in IPO activity and heightened hedging action in the stocks of companies such as Apple, Inc. according to reporting by TradersMag. Citing a TABB Group recent study, 0ptions mart trading volume exceeded 1 billion contracts in Q3. The third quarter gains represent a 4.9% increase from the second quarter total and an 8.2% increase from the year-earlier period.

options volumeIn its latest research, “U.S. Options Market Review: Third Quarter 2014,” Tabb Group also reported that U.S. options volume rebound was driven in part by a 15.8% jump in September’s total as retail fervor around Apple’s new product announcements, the Alibaba IPO and rising volatility brought monthly volume to 365.9 million contracts.

The report, compiled and written by TABB Group principal Andy Nybo, head of derivatives research, also noted that volatility spikes in late July and late September helped push volatility averages up in each month, with the CBOE index averaging 13.5 in both August and September – prompting more trading.

Weeklies trading, Nybo noted, remained strong in the third quarter with volume totaling 270 million contracts, up 7% from the second quarter total and 39% from the year-earlier period.

Noted Matt Gohd, market strategist at WallachBeth Capital, “Aside from volume spikes that typically come with increased volatility, I think there is clearly an increasing trend towards using equity option strategies for opportunistic, alpha capture and hedging purposes on the part of sophisticated investors as well as institutional fund managers.” Added Gohd, “The better news is that an increasing number of fiduciaries recognize that equity option strategies can play a crucial part of their overall approach to managing risk in a responsible way.”

Macro-Strategist Says: Funeral Services for Volatility Premature; Second Half Different than First

Below excerpt courtesy of this a.m.’s edition of Rareview Macro’s “Sight Beyond Sight” macro-strategy newsletter.

Neil Azous, Rareview Macro LLC
Neil Azous, Rareview Macro LLC

“….We start the second half of 2014 well aware that over the last few years the second half of the year has had little resemblance to the first. Over the last three years, for example, we saw major changes from the first half to the second.

• 2013: Taper/no taper whipsaw in US Treasuries and Emerging Market Foreign Exchange
• 2012: Draghi “Do Whatever it Takes” and Japanese PM Abe’s Three Arrows
• 2011: EU debt crisis and US ratings downgrade

Therefore, we remain very open to the argument that something no one is thinking about could surprise the markets. We don’t know what that might be, and we not sure anyone else does either. By definition, it will be something way off the radar right now.

Someone asked us yesterday what our best fundamental reason is for continued US equity strength and low volatility.

Our answer is that conventional wisdom argues that the market is six months forward-looking. Six months from today is the first day of 2015. The consensus S&P 500 operating EPS for 2014 is $119 and with the last price ~1960 the P/E is ~16.5x. The EPS consensus for 2015 is $133. If the conventional wisdom is correct, in that the market is a discounting mechanism six months in advance, that means the P/E just dropped below 15 (i.e. SPX last price 1960 / 2015 EPS 133 = 14.7x) starting today. This does not take into consideration that consensus expectations are too high for next year or that this year could still be revised lower. Even so, the key point is that the argument that the market is overvalued just became weaker.

This is important to recognize as volatility is first and foremost driven by earnings. So unless there is meaningful deterioration at the corporate operating performance level, volatility can stay suppressed as investors remain very conditioned to geopolitical or exogenous shocks, and they don’t have much impact on the market. Continue reading

The Anger Indicator: A Rareview

Below extract courtesy of this a.m.’s edition of Rareview Macro’s Sight Beyond Sight..(Re-published with permission from Neil Azous)

Neil Azous, Rareview Macro LLC
Neil Azous, Rareview Macro LLC

Here is an aggregation of the various statistics either sent to us from subscribers or we came across during our readings this weekend.

1.  Japan Government Pension Fund (GPIG):  Apple (AAPL), Exxon and Microsoft have the heaviest weighting in the MSCI Kokusai Index; ~87% of GPIF’s foreign stock holdings follow this benchmark. (Source:  Eurofaultlines)

2.  As far as we can tell the degree of these inflows have not yet been widely observed by other paid forecasters on the Street. EM Portfolio Inflows Reach New High In May: Our EM portfolio flows tracker indicates that portfolio inflows to emerging economies continued their upward trend of the last several months, reaching the highest level since September 2012, when the Fed launched QE3 (Chart 1). In May, EMs are estimated to have received $45 billion in portfolio inflows from global investors, up from $28 billion in April and $27 billion in March. The May figure reflects $28 billion going into EM bond markets (portfolio debt flows,Chart 2) and $17 billion into EM stock markets (portfolio equity flows, Chart 3). (Source: Institute of International Finance) Report

3.  This week the S&P 500 will surpass the 1995-96 record for number of consecutive days in which the index has traded above its 200-day moving average.

4.  SPY closed above its upper Bollinger 5 days in a row through Friday. SPY has only closed above its upper Bollinger 4 days in a row 4 times since 2009. (Source: Fat Pitch)

5.  Relative Strength Indicators (RSI)

a.  The S&P 500 (SPY) 9-day RSI is over 70 = Overbought

b.  The NASDAQ (NDX) 9-day RSI is 74 and AAPL’s is 80 = Overbought

c.  The Transports (IYT) 9-day RSI is over 77 = Overbought

d.  The Semiconductors SOX) 9-day RSI is over 70 = Overbought

6.  Since 1950, the DJIA has lost -1.9% and SPX -2.1% in June. The last 20 years have been even weaker. Moreover, the SPX has been down in 11 of the last 16 mid-term elections Junes (Source: Stock Traders Almanac).

7.  The VIX has closed below 12 for five straight days, the longest streak at that level since 2007 (Source:  Volatility Trader) Continue reading

“Its Time To Hedge, Really!” Say Top Traders

Aside from all of the Squawk Box and Fast Money “professional traders” and “market experts” who have been on “high alert” [waiting for a correction] for the past several weeks, even the most blindsided bulls have to acknowledge that every nice move is followed by a pull  back.

When considering the past 3 months gains’ of 20% plus,  one doesn’t need to be a market historian to  know that 20% gains are soon followed by profit taking.  Tune in to this good piece.

Jon Najarian: Its Time For Protection