Sunday, February 11, 2018

Regime Change

This is not the end of the volatility. This is the beginning. Something about ten straight years of Central Bank liquidity being drained off as global asset values crash back to reality, is not conducive to low volatility. Ironically, the Fed is using Trump's tax cut as cover to normalize policy. Then again, you don't have to be a fucking genius to figure this all out:

"Believe me, we are in a big fat ugly bubble...and when they raise interest rates it's all going to come crashing down" - Donny Chump, September, 2016

Way back in 2014, it was the collapse of oil and attendant collapse of Emerging Markets which sparked the volatility regime change from low vol to high vol. Likewise in this era, this past week marked the passing of the baton from the derivatives tail wagging the market dog, to the market dog wagging the derivatives tail. In the event, all of the various massively over-leveraged "low volatility" strategies began imploding, as result. Despite what some people would assert, those strategies are not driving anything anymore, but they are accelerating the collapse, to be sure...

Here we see the down turn in the Energy sector was a key factor in the volatility regime change, both in 2014 and now:

Emerging Markets were/are highly correlated...

As we see, EM stocks are still not below the halfway mark on RSI (top pane). So they have a long way to fall to oversold:

NYSE down volume is driving proportional volatility in the S&P 500. Currently far beyond 2014 levels, and now proportional with 2015 Flash crash levels

Here is where it gets interesting and *different* from 2014/2015:

Oil is twice as leveraged now, as it was in 2015 when it rolled over from this same level. Back then, oil fell an additional -35% prior to finding bottom. With double leverage, we can assume the decline will be harder, farther, and much faster:

And unlike stocks which saw a straight line 100 point S&P rally late Friday, oil closed down for the day:

"Last week's avalanche of releases from the U.S. Department of Energy showed daily oil production above 10 million barrels a day for the first time since 1970."

The production surge shown in the monthly data is unprecedented. Output rose by almost 850,000 barrels a day between August and November. It makes the first shale boom of 2014-15 look sluggish."

"I will make oil great again"