There’s been so many recent events in the past couple of weeks, that it’s been hard to keep track. Let’s review: First it was Abenomics, resulting with the plunge in the Yen, then emerging markets experienced high volatility which sent stock US markets down, then a bout of selling in bonds as Bernanke signaled the end of QE. So put that all together and what do you get? Worried investors? Sort of, but we’re not just talking about down moves – we’re talking about increased moves of all sorts. In the S&P, in Gold (ouch..again), in the Yen, in the Aussie Dollar, in 10 year notes.
In the Dow – consider the DJIA has had 12 triple digit moves this month, and at one point put in 8 in a row, from June 10th to 19th.
All of it combines to push the Vix to its highest levels of the year, and up about 81% since the March low, but you’ll also notice the VIX was down today with US stocks up.
Chart Courtesy: Yahoo Finance
But how does the VIX going down amidst a big up move reconcile with the fact that for those who go long and short – today was not less volatile, it was just volatile in another direction. As we’ve noted in a previous newsletter, while the VIX is the widely accepted barometer of volatility, it isn’t necessarily the best way to measure volatility for those who don’t just buy and hold stocks.
More importantly to managed futures participants, the VIX doesn’t do a very good job at explaining what investors are seeing in their portfolios. The fatal flaw of the VIX is that it doesn’t do a very good job of telling us what is happening when markets spike higher. Thus in order to get a better gauge of movement across markets we look to the much easier to understand average true range (ATR) calculation. ATR has been used for decades by commodities traders, and the calculation is pretty easy to understand as well. When calculating the ATR all we are considering are the market highs and lows for the current trading ATRsession along with the previous market close, and then averaging them across a predetermined time period. In this case, we looked back 20 days to see what the average market movement from one close to the next was.
With this view, you’ll see volatility at 1.5 year highs in stocks, gold, Yen, and 10 yr notes.
(Disclaimer: past performance is not necessarily indicative of future results)
What’s this mean for the next 20 days, much less the rest of the year – who knows? This could be a spike which subsides with the next bout of good economic news (or I guess… bad economic news so people think QE will come back), or it could be the start of a volatility shift to higher levels a la 2007/2008.
With managed futures success during the financial crisis, you know we’re hoping for that 2007/2008 higher volatility (and we want it directional) Stay tuned…