Ok, so Monday was the worst day of the year for stocks.
That would seem to suggest that if Trump was a “good thing” for equities (which he clearly was for a few months), you can always have “too much of a good thing.” In this case “too much” meant the institution of a de facto Muslim ban and effectively shutting out the Joint Chiefs in favor of a right-wing propagandist on the National Security Council.
And you know, I’m really not trying to be partisan there. That’s actually what happened. He pushed the envelope too hard and people freaked the f*ck out. Which is precisely what I’ve been saying was bound to happen.
I’m not generally enamored with commenting on the reflation narrative today. I don’t think that’s all that material for Monday. Risk just sold off. Plain and simple.
The VIX nearly grabbed a 13 handle, but fell a bit into the close. Here’s a bit of historical context for vol via Goldman:
After a VIX decline below 11, median VIX levels over the next one-week / onemonth / three-months were all fairly low at 11.1 / 11.4 / 12.1, respectively. The maximum VIX level was 14.6 within a week after dropping below 11, and 19.6 within the next month. Said another way, the worst case historical VIX scenario was a “jump” back to the long-run average VIX level of 19.7 over the next month. Those results are similar if we expand our sample to include all trading days in which the VIX closed below 11 (the lower part of the table). Both results tend to suggest that low vol begets low vol.
Yes, “low vol begets low vol.” How exactly is that meaningful? That’s like saying “high stocks beget high stocks.” The caveat is the same either way: “until it doesn’t.”
On that note, here’s a handy VIX timeline, annotated for meaningful spikes.