Will this week be as turbulent?

February 12, 2018 09:21 AM

It's been quite a tumultuous week in the markets, as we all know, but something seems amiss. On Thursday, when the Bank of England's Mark Carney talked about raising rates faster than expected, the pound popped (as one would expect) but it did not take even a few hours for it to completely reverse trend as if nothing happened, and the U.S. dollar was back to being strong again. The speed of reversal was quite strange! 

Furthermore, on Thursday after the 10-year touched a high, the rates fell, but despite that happening, the markets made a violent downturn less than an hour before close. This makes me wonder how strong the cause-effect of the rates on equity markets is at this point -- evidently it is one of the major underlying factors given the simple yield comparison, but obviously, it's not so straightforward.

It's fascinating how the markets get interpreted -- mid week when crude inventories turned out much higher than estimates, WTI crude oil corrected a little, but then blew past the $64 per barrel level, because it was reported that with strong economies globally, OPEC cuts, etc., the demand is still strong, so up we go....of course, a weak dollar only lent a helping hand to higher prices. But then yesterday, granted the dollar was relatively stronger, crude dropped below the psychological $60 level and it got blamed on over-supply (it never hurts to keep an eye on the Baltic indices -- I've been following shipping numbers for a long time, having gotten introduced to that index during my commodity days at Enron) as well. One would expect that a strong dollar would also bring gold prices down and that had been happening, but of course, yesterday one could attribute flat gold prices to gold demand for 'safe haven' status (I'll buy that?). 

Talking about commodities, given the record cold we've been experiencing, I was quite surprised that the heating oil inventories were higher than expected (I would have expected a much larger drawdown), but of course, that's not my expertise. Fundamentally, in my opinion, some piece of the puzzle is missing.

It's been interesting reading all the explanations of the inverse VIX ETNs being responsible for the market downdraft. Given that I have been computing VIX, VXX etc. real-time with full detailed option calcs and trading VIX products since 2005 (I'd like to think I know something about it), it seems like, in my opinion, this is more of a case of the tail wagging the dog, when it gets reported that the inverse vix ETF's caused these violent moves in the market, sending volatility even higher....but had the VIX not shot up (as it always does during such violent moves), those ETF's would not have been affected and XIV would not be accelerated to closure. Granted, there is a cascading effect, but I find it hard to believe that one can say that was the cause. After all, the VIX did shoot up during Brexit as well, and inverse ETFs used to be traded then too (albeit assets under management was lower)... perhaps I missed something?

It seems like now with inflation fears in the limelight, the direction of further equity moves is pegged on inflation numbers to be released this week. But a trip to the grocery store/gas station wherein even a basic fruit like bananas jumps from 49c/lb to 69c/lb, and the uptick in gas prices (by at least $0.30c/gallon) should be telling -- realizing fully well that these items fall under the food, energy category, and there's a reason that numbers ex-food, energy get reported, but still... Now playing devil's advocate, I am somewhat surprised that if there is inflation, then why did the toll fare for Lincoln Tunnel not go up by it's annual $1 increase (barring the one time when it jumped from $8 to $12). Is that more politically and less economically driven?

Admittedly, it was quite a show yesterday how the equity markets shot right up immediately after SPX dropped below it's 200-day moving average, which as we all know is a key technical level for chartists (charting is not my forte, so I will not speak much on it), and would have implied a bear market.....I am perplexed why someone would come in big time on a Friday afternoon and ramp up the markets into close, after such a turbulent week and more so, after such a significant technical level got crossed (raising fear levels).....rumor has it that only someone with a 'license to print' money would do so....I'll buy the Powell put, but then almost all the Fed speakers this week have been reinforcing the fact that the bond market and rising rates are in sync with the Fed's intentions (for once), and that would back the QT in effect and not quantitative easing, so it remains a mystery.

But then, that's all history. Do I think this coming week will be turbulent? I don't think so (everyone has the weekend to think it all through and strategize accordingly). I think we'll more likely see some big upswings, and that's why I didn't buy any puts. I don't want to get double-dinged with a delta loss and a vega loss, not to mention theta loss, but then given an unsolved mystery, I didn't short any puts either. I prefer not to lose money than not make money.

I'm still scratching my head about why the volumes were relatively light given such violent moves, but whoever said that the markets were rational, right.

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