Friday, September 7, 2012

Aqumin Volatility Newsletter 09/07/2012 $UXVY $DUST


Are we living in bizarro world?

The plan presented Thursday by Mario Draghi put the market into orbit. 2%+ rallies are great but this one was more a result of short covering than anything else. The ECB will print and the Euro goes up-must be short covering. The NFP data is not so good and the 2% rally of yesterday gets a boost- must be short covering. At least gold was not buying the non-inflation thing as metal rallied to near term highs. What asset is performing the worst this year?

The answer is volatility. See below in the AlphaVision™ for Bloomberg landscape, the UVXY (ProShares Ultra 2x short term VIX futures) was the worst performing (inverse scale) actively traded ETF this last week (10-1 reverse split not withstanding). UVXY made year lows today too. Also the name was showing higher relative (dark green building) 10 day volatility to its own 30 day volatility. The collapse in UVXY has serious velocity, which screams paper wanted out. The only name close was DUST (levered Bearish gold product from Direxion). The market, at least from a volatility standpoint, is calling the Euro crisis over and it just might be.

9-7-2012 2-52-32 PM

My sense of this is that the volatility collapsed after Thursday’s Spanish Bond auction when Draghi basically told the world the ECB is ready to print to save the Euro. I think all the market really cares about is that the Euro holds together, at least in this algo driven age. Stocks are living on a dose of news snippets and yesterday’s was the doozy. I think most of this year’s rally was just the addition of last year’s non performance. After all the 14% the broader market is up is just 7% for last year (basically flat) plus the 7% for this year so this level is reasonable. Without any Euro nonsense, which is mostly freezing up liquidity, we could easily go higher.

Speaking of news, the German High Court will rule on September 12th whether the ECB bond buying scheme is legal. If it is, I think the market is off to the races for the rest of the year as most of the money has been collecting dust in cash, T-bonds and mattresses. Ask the question if you really want to sell volatility into bottom coming into yet another Euro announcement? Maybe buying some volatility of volatility on September 11th (that is a sad coincidence) will help ride out any surprise decision from a Supreme Court. After all, Supreme Court’s are predictable, right?

AlphaVision™ – data from Bloomberg

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