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10Y S&P 500 volatility

“There’s No Point Denying The Reality We Live In”

On Monday in “There Are Plenty Of Investors Who Would Celebrate An 8% Drop,” I noted with more than a little amusement that self-described “perma-bull” Mark Cudmore had gotten over a fleeting bout of bearishness that manifested itself in a series of overtly negative late January missives.

Well on Wednesday, Cudmore is back with another upbeat message for markets – albeit one that drips with sarcasm.

As the former FX trader chuckles at the idea that a 1.7% “drawdown” now counts as a “correction,” I’m reminded of Goldman’s latest in which the bank notes that trying to time dips is a good way to kill your long-term returns. Of course the very same visual that illustrates that point also shows that had you successfully timed drawdowns, you’d be up 500%+ off the 2009 lows rather than a “measly” 164%:

GS1

Cudmore also suggests that if we do see a further “correction” in equities, that might trigger a safe haven bid for USTs which, all else equal, would reverse the trend we’ve seen in the last three days (when bonds and stocks have sold off together)…

Trouble

…leading to a flatter curve and a squeezing of that three-sigma Treasury short…

SocGen2

(SocGen)

As you read the commentary excerpted below, ask yourself if, given valuations, you might be better off moving to calls if you’re hell bent on capturing some assumed further upside…

GS2

(Goldman)

Via Bloomberg’s Mark Cudmore

It’s a testament to how far markets have come that I’m calling the recent slippage in U.S. stocks the start of the much-talked about and widely anticipated “correction.” My guess is that everyone will get very excited for a couple of weeks but this won’t mark the start of any long-term selloff.

  • S&P 500 e-mini futures are in the midst of their largest peak-to-trough drawdown of 2017. They’ve so far plummeted a whole — gasp — 1.7%
  • That just emphasizes how little volatility there has been. The largest correction since November 9 has been only 2%. The steep upward trendline from that day’s low is being tested
  • A closing break will trigger further losses. They could be sizable when set against the lack of retracements of the last year. But, importantly, they’ll probably be irrelevant when framed against the 30% rally from the 2016 low, let alone the 250% rally from the 2009 nadir.
  • For example, a 7% fall will have painful short-term knock-on effects. But there’ll be basically no structural damage because that sort of drop still leaves U.S. stocks above what was a record four months ago. If anything, such a retracement could be seen as a healthy consolidation in that it’ll clean out complacency
  • As for potential knock-on effects, I can’t help but feel that those record speculative shorts in 10-year U.S. Treasuries might get squeezed as the rate curve flattens further. This might, in turn, weigh on the dollar — although probably not versus emerging market currencies
  • In a month or two, we may look back on commodities as having been the canary in the coal mine. They mostly peaked in mid- February. Hard to sustain the reflationary trade if the world’s core inputs are falling in value
  • It may seem worrying to market veterans that a market drop of only 1.7% is the siren call to buckle down for some volatility, but there’s no point denying the reality we live in
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