Walk on the Wild Side
It doesn't look like it from this chart, aside from maybe the Topix, but it was a crazy week. Most probably already know this, unless you were hiding under a rock or on some remote island with no interweb service. This week's title you might recognize as the 1970s rocker from Lou Reed, but it's also a movie from the 60s staring a young Jane Fonda and even novel in the 50s. Enough of the lesson in pop culture, let's get into these markets more.
When you look at my old chart with less assets, but more data points, you can see the huge swings in risk assets.
It all started late Friday as the S&P futures slid into the close and continued that after the close. VIX futures we rising as well, which is common. You can see in the chart below the futures are the lower lines. Here you see the front month in green and the 3M in white. They both jumped into the mid-30s by the time most of us were waking up on the East Coast of the US. I'll refer to the what happen because of the carry trade below. What I find interesting and not many follow is the vast difference during points of true volatility the VIX dramatically increase over what we see in the VIX futures markets. This just shows how an index made up of highly complex formula is hard to follow and explain even by many pros. The general idea of this spread with the index was the formula and some of the untradeable bid/offers that are elements of it.
This VIX move though was a doosie. If you look at the intraday values, it hit the 60s, which indicates a move on the S&P of more than 4% per day. Let's take a look back at the other events that created such a move on the index. It's only spent 90ish days over 50 since 1990. Of those, 69 of them were during the GFC and another 21 were during COVID. This is a very rare event, even if it was due to a limitation of the formula. Credit for the chart idea below is to Brent Donnelly , who had one like this but tweaked for a joke.
It wasn't just US equities that felt the shock.
Here are a few good Tweets, or whatever we're calling them now, on volatility and the carry trade if you wanted to learn more about this past week and what the future may hold.
Markets will be focused on the upcoming US PPI & CPI releases. We will also get CPI from France and the UK along with GDP numbers from Japan. So global economic numbers will be in focus once again. Earnings season continues in the US as well with retail giants Walmart and Home Depot reporting. Others reporting Alibaba, Applied Materials, Cisco, Deere, and Tencent.
Best of the Week
This was an informative conversation about one of the most admired and secretive trading firms. This discussion gets a bit technical at times, but really helps you understand how some of the best traders think. Todd walks Ted through his early career and the early times of Susquehanna. Todd now runs the training groups for SIG's trading group. There he's teaching smart people to become traders by showing them how to blend the art of trading with the science of it. New employees first sit with traders on the desk to learn, then move into a class with mock tracking. This helps them get them to understand the inputs of a decision and where things go right or wrong. They want traders to focus on making quality decisions. Todd also explains that SIG is involved in many different businesses outside trading now, like insurance, private equity, venture, sports books, and event markets, but they're all doing the same thing, buying and selling risk at the appropriate price. He explains that SIG's structure allows them to succeed in areas that multi-strat hedge funds cannot. SIG principals understand the structure and the way the firm risks capital and tis allows them to not adhere to short term reporting to clients. A big learning point I took out of this was that SIG thought Black-Scholes was mispricing options. At the start of the firm, they concluded that they didn't want to be short the downside. This was fortunate because they started right before the October 87 crash and set them up for success. Todd wraps with a explanation of his time on Jeopardy and how his final Jeopardy betting was calculated. There's a ton more here, so this is well worth an hour of your day. Listening time: 72 minutes
Best of the Rest
This is a bit of a longer post, but well worth it if you want to gain a better understanding of a key part of today's market. The team at FT walks us through the relatively short history of fixed income ETFs. BGI launched the first one in Canada in November of 2000 and it took 2 more years to launch similar funds in the US. There are now more than $2T in fixed income ETFs. The authors show how it's been a bit of a hockey stick of growth and how there are now 18 ETFs among the world's 50 largest funds. They note that some call this dangerous, but some feel it's improved liquidity in the very fragmented bond market. The liquidity ETFs provided the bond market during COVID was an enormous statement. The Fed was buying them to provide support and this was seen as a vote of confidence. Below is a chart form the article showing the strong inflows of late. The article then talks about how the AGG ETF is managed with PM James Mauro and reviews the creation redemption process. There's also a chart (shared below) that shows the complete lack of liquidity in the corporate bond market from 2018. Some bonds never even traded. There's also a section on how a bond's inclusion in the index may impact its prices. Electronic trading is growing in fixed income and the article covers some of the developments there as it moves from phone only. With electronic trading, you also get into more portfolio trading, where hundreds of bonds trade together in one trade. According to a Barclays' analyst quoted in the report, this method has grown from 2% as of 6 years ago to more than 9% today. Another development of the electronification is systematic trading, which has also grown. The final point the authors make is that as fixed income becomes more like equities, the more likely you're to see more extreme moves. Great article!
Another lesson in technical analysis from J.C. Parets, CMT. JC points out that very few individual stocks made 52 week lows. I liked the chart below he shared that shows the lows over different time periods. You can see here that we're short on even 3 month lows.
Nasdaq is looking to clean up their listings by delisting their penny stocks. The exchange actually has a rule that requires companies to stay above $1. Essentially, if they close below that number for 30 days, they then get 180 to get back above, but there's a longer second 180 days and then a appeal process. Looking at Nasdaq listings there are currently 435 names that have a $1 or less stock price. Another 365 of them with a 30 day average less than $1, and 298 with the last 30 days all below that $1. Further there are another 393 with a price below $2. There are close to 3,700 listings on the Nasdaq exchanges, which means about 8% should receive a warning for delisting.
One for the Road
France did quite well for itself this year at the Olympics. The French athletes took home their most medals since they hosted the Summer Games in 1900. Those games had only 10 countries participate. This article attempts to define why home countries do better when they host. Is it jetlag of the other athletes? Do the home athletes feel uplifted at home? Do judges? Do the home jurisdictions spend more on training? Well, first off they don't ALWAYS do better. Sometimes circumstances help those counts. The 1980 US and 1984 Russian boycotts led to huge increases from the host countries.
Thanks for reading. Have an epic week. I'm likely off for a weeks now with some guest coming into town, a vacation and the Labor day holiday.