Volatility – Virus, Bubble, Both?

Source: Episode



Interesting look showing how various shocks impacted volatility trading over the past 27 or so years.

M&G, the folks behind the above chart, note that:

“There have been only three phases in last 25 years when the S&P500 has moved this rapidly in this short a period of time, a fact drawn to my attention by my perceptive colleague, Marc Beckenstrater (see figure 1). Similar moves in the last 25 years have coincided with genuine events. The Asian crisis, the tech bust, and the GFC.”

The February event occurred for what we now know believe were specific reasons: the collapse of the leveraged-short-volatility notes, a widely held position among some hedge funds. We discussed this in some detail last month (Why 2018 in Markets Feels So Awful), noting (my explanation of why the VIX notes unwound is after the jump)

I don’t see that event as a indicating the economy is deteriorating; nor do I see the signs of a marker top. Note that a robust economy that withstands a blow is healthy. As ECRI’s Lakshman Achuthan notes, weak economies are tipped into recession by even a modest shock.

I have written about the subject of how market tops are formed in the past; this does not have any of those characteristics (yet).