It took some downgrades of Spain and Italy to mark the Top of this last momo short squeeze rally. At one stage today, SPX was 100 handles higher in three days. This market is still driven by greed and fear, dominated by HFT confusing many investors. We see risk off across assets after Fitch Downgrades Spain and Italy. For our long term charts, click here.
Further insight into Volatility. Guest Post by Macro Story.
Vix VS Skew
I posted this chart on Thursday and a few had a hard time seeing the inverse correlation between the Skew and the Vix. Two important points I want to make with this chart.
Point 1 – look at the three red boxes showing the correlating trends (emphasis on trend). Notice the final red box and how the trend is lower (i.e. Vix higher).
Point 2 – notice how a similar divergence occurred between the Skew and the Vix right before a major jump in the Vix (now and where the arrow is drawn). That is why I say an imminent move higher in the Vix is highly probable.
The next three charts show a repeating pattern between now and early August before the big equity decline.
This shows the current divergence between the SPX and the Skew
As people buy everything after the Friday figures are out, don’t forget, this is the brutal squeeze we wrote of earlier this week. The moves up are magnified by short covering, and short gamma momos covering positions. The volumes are not impressive, and we are still trading within those “famous” Trend Channels. Let’s see if today will mark the reversal as shorts cover positions in panic mood. Note volatility is getting hit hard in European Trading, as the ES futures is up 100 handles since Tuesday…
With the Markets confusing many, both bulls and bears, below is a good piece of what to expect. We are in bear territory, but the bounces will be brutal, and people will trade based on greed and fear. These last day’s “bull”, has probably a little more to go, before we once again reverse down. Another Greek weekend coming up…
In November of 2007 as our risk ratio indicator was plunging into what should have been a “buying zone” of extreme bearishness, the buy/sell timing indicator was just beginning to initiate a “sell” signal, warning that prices were moving lower. As a result, each successive turn UP of the risk ratio indicator remained short lived as investors were sucked into short-term rallies that ultimately failed. It wasn’t until May of 2009 that both the risk ratio indicator and the buy/sell timing indicator gave“longer term” investors an all clear signal to move cash back into risk based assets.
Today, we are witnessing exactly the same set up. The risk ratio indicator is at levels that are bearish enough to warrant a rally. However, with the timing indicator on a clear “sell” signal, that rally should be sold into. ….
Full article here.
Early morning trading is rather dull, with Europe trading down from the US close. Action is rather dull, with HFT churning no volume stocks. We are still within the positive trend channel we started forming a few days ago. Let’s see if we continue trading within the short term channel.
The government of Mongolia has backed down from its demand for a larger share of Oyu Tolgoi, one of the world’s biggest new copper mines, in an about-turn that boosted the share price of Rio Tinto, the FT reports. In a joint statement, http://ftalphaville.ft.com/thecut/2011/10/07/695851/mongolia-retreats-on-row-over-rio-mine/
Banks based outside the US could be dragged into the American “Volcker Rule”, which bans proprietary trading, according to the latest draft of the rule and lawyers that were ploughing through leaked copies on Thursday, http://ftalphaville.ft.com/thecut/2011/10/07/695801/volcker-rule-draft-contains-non-us-prop-trading-ban/
George Soros, the billionaire hedge fund manager, has lost a case at the European Court of Human Rights to have his criminal conviction for insider dealing quashed, the FT reports. The failed appeal at announced http://ftalphaville.ft.com/thecut/2011/10/07/695776/soros-fails-to-quash-insider-trading-conviction/
A real-estate fund run by Goldman Sachs has walked away from a $1.26bn deal with Lehman Brothers Holdings to buy a portfolio of 10 office buildings in a suburb of Washington, the WSJ reports. A lawsuit filed Thursday with the US Bankruptcy Court in Manhattan shows Lehman is seeking $100m in damages from the Goldman-run US Real Estate Opportunities fund,http://ftalphaville.ft.com/thecut/2011/10/07/695756/goldman-sued-over-lehman-real-estate-deal/