Aqumin Volatility Newsletter 11/16/2011 $AAPL, $NLY, $AGNC

Are Financials still leading the way?

Headline news this morning has the Super committee in Congress already looking to fudge their debt reduction pledges. Maybe they don’t have CNN and are not watching what happens to countries when they don’t get their house in order. Two leaders in as many weeks were brought down by the bond market. Yes, that is right. Not by voters, but a bond market that is flexing its muscles. Sort of like the Arab Spring for Euro Leaders addicted to debt. Congress can change its mind (one can hope) but I think you can see the unease in the equity markets. Let’s look at some individual volatility for the most active Equity and ETF option classes.

First I have a wide view of 30 Day volatility in the AlphaVision for Bloomberg Landscape. Any name in dark green is trading over 40% 30 Day historical volatility (HV30) in the underlying and dark red is under 20%. Building Height is HV30 also to add some granularity to the view. Building footprint is market capitalization. You should see fatter buildings tend toward red in color since higher market cap stocks tend to trade at lower HV30’s. Note the relatively higher HV30 for AAPL in the lower left corner.

I use 40% HV as a soft screen indicator. When the market is more benign most of the bigger market capitalization stocks trade around 20% HV30. 40% HV is a double and good place for me to review broader market activity.

Just zooming in to the Financials and Materials (gold and miners) I see very few stocks with lower HV30’s. Both of those Sectors really show the strain of what is going on right now. Normally I see more red in both those (lower HV30) and I am seeing almost none now. Before I can believe any rally in the overall market, these colors have to change to at least light green. Financials and Gold Miners need to become somewhat boring and that is just not the case. In the Financials, there are just a couple of high yielding REITS (NLY and AGNC with current dividends well over 10%) with lower HV30. These REITS were trading at 40%+ HV 30 at the height of the crisis this summer and have come back a bit. Now that the Fed has signaled lower rates into the future these might be worth a look (I own NLY in an IRA) at a very depressed price (think stock with a collar for now). They are trading cheaply and I think a big part of the reason is the instability in the bond market. The bond market has already shown its willingness to push for change; I just don’t want it to happen on this side of the Atlantic.

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