Volatility on no news

By Felix Salmon
June 29, 2010
rises on bad news and panics -- as it's doing today -- on no news at all? The 10-year Treasury is now yielding less than 3%, the Dow's back below 10,000, the VIX is over 30, and the Nasdaq is down 2.4% in a matter of minutes; French stocks have fallen more than 3% today, and in general the global risk-aversion trade seems to be back on.

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What do you call a market which rises on bad news and panics — as it’s doing today — on no news at all? The 10-year Treasury is now yielding less than 3%, the Dow’s back below 10,000, the VIX is over 30, and the Nasdaq is down 2.4% in a matter of minutes; French stocks have fallen more than 3% today, and in general the global risk-aversion trade seems to be back on.

Interestingly, gold is down a little today: maybe at these levels it’s more of a risk asset than a safe haven. But more generally I think we’re seeing what happens to markets which are much more global, complex, and interconnected than they’ve ever been in the past: correlations can appear out of nowhere, and it’s silly to even attempt to explain significant intraday market movements by recourse to anything in the news.

Our brains are hard-wired to look for causality wherever we can, so if news isn’t causing this volatility then naturally we look for other explanations instead: is there something churning hard below the surface? Did a large number of hedge funds all have very similar trades, and now they’re all trying to exit their positions at the same time? It’s impossible to know for sure, but I do wonder how and whether the phenomenon of high volatility on no news correlates with the rise of hedge funds.

If you’re invested in these kind of markets, only the two extremes make any sense, it seems to me. Either you’re a buy-and-hold type who’s convinced about the existence of the equity premium over the long term and who happily ignores all intraday volatility, or else you’re a high-frequency trader who loves to make money on a tick-by-tick basis. Everybody else is liable to get stopped out, or otherwise crushed. And in many ways, the only winning move is not to play.


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4 words: BP counterparty risk exposure. ;)

Posted by Foppe | Report as abusive

Herr Doktor Doktor finally using the “D” word in a big bold way had nothing to do with any of this? Scootch difficult to believe.

Posted by Uncle_Billy | Report as abusive

A sense of foreboding, the feeling they might actually get caught after all, is the only thing Wall Street can’t be blamed for. So let them have their moment.

Posted by HBC | Report as abusive

Who says I can’t be both a high-frequency trader in one account and long term buy and hold in another?

Posted by wpantagruel | Report as abusive

The news is the revision of the China leading index and a poor CB consumer confidence number that contradicts the Michigan sentiment number of last Friday. A story about Spanish banks being worried about having to pay back the ECB on 1 Jul is probably nonsense, but probably didn’t help the mood.

Global markets are off on this news. The JPY is rising against everything, as it does when risk is in the air. The EUR is falling, presumably because lower Chinese growth means fewer European exports to China. SPX followed the futures and other equity markets down on the open today. Treasuries are flirting with 3%. Oil and copper are both down.

These moves are consistent with the current macro backdrop. The recovery is continuing around the world, with nothing worse in the data than a slowing of PMI’s and poor housing data from a market everybody knew was on government life support, and central banks are merrily keeping liquidity flowing… BUT China, current importer of last resort, continues to tighten (by letting its currency appreciate in the most recent instance), the US stimulus is falling out of the growth numbers, and politicians are getting keen on austerity which will inevitably hit short-term growth. So the numbers are fine but the story is bad, and the question of the moment is: slowdown or double-dip? Any data that suggest there are worse numbers to come raise the probability of the bad story coming true, and thus of “double-dip”, and therefore should logically lead to increased risk aversion. Further, with a lot less dry powder in the authorities’ kegs than they had at the start of the crisis, “double-dip” is attended by some probability of a worse outcome for the economy than we have seen already. A small increase in the chances of a very bad outcome can have quite a large effect on the price of things (according to some maths I once read).

Just a word on gold — gold has been a risk trade for ages, except for a brief spell when Eurozone sovereign defaults loomed as a possibility. If risk assets fall and the Eurozone is not blowing up, expect a fall in gold.

Posted by JDB | Report as abusive

What JDB said, more or less.

The one thing I have to add is that you don’t need to expect a double-dip to mark down risk assets. Current austerity talk seems to have focused the markets on the verity that there never was a V-bottom. Repricing to levels in line with the moderate recovery that’s been going on since last summer is all I see.

Buy-and-hold vs HFT is one way to label beta versus alpha. If you’re not generating alpha, by all means you should allocate to free beta and go to the beach. If you can generate alpha, whether tick-by-tick or otherwise, you should layer that on as well. However, alpha usually costs you more in time than it’s worth. Indexing and pursuing your career more seriously generally is the better bet.

Posted by wcw | Report as abusive

Entire herds of sheep or cattle sometimes stampede for no apparent reason.

Maybe a fly bit one of ‘em on the ear, it bucked, and they were all hot n’ itchy to begin with.

You can throw down all the fancy granular causality you want and it may or may not explain anything.

People are just plain hot n’ itchy right now. Too damn much bad news floating around in the background noise… Krugman calling this another “long” depression and all.

You can laugh that sort of thing off, but it sticks to your brain anyway. A lot of ill, yet plausible, notions are sticking to our brains these days.

Posted by bryanX | Report as abusive

But Bryan, you didn’t use any jargon!

Posted by Uncle_Billy | Report as abusive

Everyone looks at information released today to explain the resumption of the primary trend. The market no longer predicts economic conditions but instead adjusts to reflect economic conditions. Market participants are reactionary. It is the predisposition of investors to be optimistic and they certainly have had positive reinforcement within this condition over the past 3 decades. Unfortunately re-conditioning is painful and takes time…ie years. So if you are hanging your hat on past conditioning you risk your net worth.

Posted by csodak | Report as abusive

WIdespread panic in the financial sector kind of makes you wonder about the wisdom of privatization and deregulation in general. Also not sure whether to add laugh track to the CNBC video, or just listen to the hit single.

Posted by HBC | Report as abusive

Stocks cannot rally with treasury yields so low. The Bond market is spooked and until they aren’t stocks will go lower

Posted by STORYBURNcool | Report as abusive

I can safely say that in the wonderful world of FOREX there’s something ugly brewing in the Swedish krona. Rate decision tomorrow and all hedgefunds are long SEK and getting the jitters so they’ve bought alot of low delta calls as protection. Even though nothing has happened in days we’ve seen Volatilities rise from 8,5 to 10%. All on the back of this fear. Problem is, they will be right and the EXIT will be narrow and crowded…

Posted by Meriwether | Report as abusive

Do solid dividends count as some sort of equity premium? I’d rather make 3+% in a year as opposed to 10 years in treasuries. Yes, your capital is at risk in the short term, but by the time the 1 year matches this level, I think (nothing to really back this up) you’ll be looking at a higher stock price than what you originally purchased.

Posted by djiddish98 | Report as abusive

By my system, at least, the more volatile sectors were consistently and uniformly overpriced relative to the consumer/dividend stocks from December through June. Barring a roaring recovery, that HAD to reverse eventually. Finally it has.

Will be interesting to see what the second quarter earnings are like? I doubt we’ll see any lasting change in sentiment before then. But we may already be at the point in the bear market where index investing is more profitable than buying bonds (at a 3% yield?!?).

Posted by TFF | Report as abusive

do not play, is a zero sum activity at best – (minus) brokerage fees = you lose

Posted by robb1 | Report as abusive

Y’all have to go back ans study Pareto Distributions and basic Mandelbrot fractals, then y’all only needs to sit back and relax cause there ain’t no zero-sum game and all things revert to the mean of their distribution.Now Z-S game theory bears no symmetry to prices, pricing or CAPM at all. so y’alls has wasted your time studying it to sound smart. The only one who really understood Z-S theory was its creator, Johnny Von Neumann and he was trying to figure out how to build Atomic bombs in the deserts of New Mexico outside of Los Alamos. And, by the way, there ain’t no causality, too, in pricing, prices and CAPM.

Posted by ACEMAN1 | Report as abusive