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Escalator Up, Elevator Down
In "Playing The Game," I noted that one risk to somnolent summer markets is the potentially unstable accumulation of equity exposure from the vol control universe.
Regular readers are familiar with the dynamic: As the range of daily spot outcomes compresses, realized vol recedes, dictating mechanical re-leveraging from strategies that allocate based on volatility.
That process, I reminded folks on Tuesday, is "escalator up, elevator down." The figure below illustrates the point using Nomura's
It always was said that markets in August tend to be sleepy. But there also have been some wild exceptions in recent years. Not sure what a trigger for the latter would be, but the unexpected can lead to the most violent reactions.