From the latest Weekend Notes by One River Asset Management's Eric Peters
Beep Beep
The market finally woke up,” said Roadrunner, the market’s top volatility trader.“The volatility of the VIX index jumped 40% on Wednesday, that’s the 2nd biggest daily move in the VVIX we’ve ever seen.” The S&P fell just 1.8% on Trump/Comey jitters.
“We’ve been short vol all year, and sold more into that spike. When the vol of vol jumps violently, and people are panic-buying, it’s pretty easy to do.” In the background, volatility resumed its collapse. “Feels like this will be a really busy summer.”
“On Thursday we got a glimpse of what a big political crisis looks like,” continued Roadrunner, relaxed. Brazilian stocks had fallen 10%, the currency fell 6%. The 3x leveraged Brazilian ETF fell 40%.
“That’s what a crisis would look like here too. But the market is telling us this isn’t what’s happening.”
The S&P 500 closed the week -0.4%. The VIX finished the week +1.6 points at 12.04. “This drama won’t play out the way the media suggests. They’ve been wrong the whole way. The Trump agenda hasn’t been permanently derailed.”
“Apple vol is only bid on the upside,” continued Roadrunner, glancing left, right. “There’s no fear in the option market when Apple falls.”
He looked up. “That vol market is telling us there’s still a very large move to the upside.” And surrounded by hysteria, Roadrunner relaxed.
“It’s hard but you need to still be long the overall market. Prices are high, but people aren’t really bullish.” Cash levels have yet to collapse.
“These markets don’t end without a rip roaring rally. These things end with volatility to the upside. And then there’s no one left to buy.”
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And a bonus anecdote about pachyderms:
“Investors are eating like birds and crapping like elephants,” said the zookeeper. “They’re pecking at tiny seeds, crumbs. Picking up the odd basis point here and there.”
Feathered friends darted about the dusty floor, elephants lumbering overhead, the slightest misstep instant death.
“Birds always find ways to convince themselves that through good risk management, they can make poor risk reward decisions and fly away just in time.”
Brazilian stocks gapped lower, without warning. A discontinuous move. Every stop-loss irrelevant.