Volatility Squared
Sally Limantour
Carry traders are in an option buying frenzy with implied volatility on a 1-month dollar-yen option moving to its highest level since Aug. Some are predicting a 10% move by month end. As mentioned here these last two weeks, volatility was a screaming buy in many asset classes – not just stocks and the VIX. Meanwhile, the 30-day statistical volatility of the volatility indices more than doubled overnight!
Yesterday’s Chicago purchasing manager’s Index for Feb. came in at 48.7 and anything under 50 is not particularly healthy. In addition inventories rose sharply to 54.5 from 41.9 which is bothersome as is the new home sales number in January, which fell 16.6%. With the medium/long term models still on a sell signal from last week and the short term model on a sell from Tuesday morning, my view remains the same as Monday – continued weakness with increased intraday volatility that will make day trading a fun job again. Witness this morning’s sharp break and rally, something nimble traders welcome. Until we get solid closes over 1429.00 in ESH7 and models turn at least neutral, I will stay defensive while taking advantage of intraday extremes.Bernanke said he did not see a “real trigger” for the sell off on Tuesday. I wholeheartedly disagree as mentioned in, “the great unwind.” He also said he doesn’t see any real issue with liquidity. This statement is causing mixed interpretations. Some think he is communicating an ongoing “Greenspan put” (which refers to investor faith that the Fed will always combat market declines) while others think he means this is not the Greenspan Fed and we should not expect rate cuts if financial markets get wobbly. You choose, but remember it was Bernanke who in 2004 during a Q&A said, “I think it’s extraordinarily difficult for central bank to know in advance or even after the fact whether or not there’s been a bubble in an asset price.” (Note to self - watch the charts. They speak volumes without the ambiguity).
On dips, I continue to add to volatility positions in currencies and stocks and added to long positions in yen, gold and silver while moving up stops in the agricultural sector to protect profits. The metals and agricultural sectors have been outperforming and corn is up 90% since first writing about the bullish outlook.
