S&P 500 volatility

“Quick, Buy That (Macro) Dip!”

Earlier today, we noted that the correlation between implied vol and equities is breaking down as traders buy cheap protection on expected surges/plunges while the market continues to grind ever higher.

As WSJ writes, “cash flooding in from private investors has pushed up the market overall, but has also led professionals to worry a little more about the risks—both of a meltdown and, conceivably, a ‘melt-up,’ when the market soars 10% or more in short order. The prospect of either big losses or big gains prompts buying of options, pushing up their cost, proxied by implied volatility.”


We also noted that when it comes to realized vol, January was the 5th calmest month on record and, to quote WSJ again, “the calm on the surface means it is cheaper than normal to hedge.” You can thank – in part – collapsing stock and sector correlations:



Well, when it comes to suppressed realized vol, we found the following chart from BofAML to be particularly interesting. Have a look at how quickly spikes in volatility have rapidly mean reverted during recent shock events like the US election and Brexit, versus history:


Consider that, and think back to the following from JPMorgan’s Marko Kolanovic:

Various quantitative and qualitative metrics indicate that markets have become more macro driven and react faster to the new information. A qualitative example shows the reaction time for recent major events (August ’15 selloff, Brexit, US Election, Italy Referendum) that has compressed from weeks to hours. Quantitatively, we are noticing a higher density of market turning points. The average variability of asset trends (averaged across major asset classes) that show turning points occurring at the fastest pace in recent history (~30 years).Given the engagement of central banks with markets and geopolitical developments, it should not be a surprise that markets are more macro driven.


In short: buy that f*cking (macro) dip. And right quick.


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