Forecast – A serious bout of risk aversion with acid rain over Europe
Posted on 19 April 2010
I’m a fan of John Taylor at FX Concepts – if only for the clarity of his calls. Zero Hedge has some of his recent thoughts (here) including these gems “2011 will be worse than 2008″ and “there is a very high probability of a serious bout of risk aversion beginning in the next five trading days and continuing into the week of May 3.” Noted.
So a quick review of some of our risk indicators:
The VIX and credit spreads have been flirting around new lows for the last couple of weeks – until Friday that is. Whether it was the Goldman news, or the selloff in Google et al that preceeded the said news, volatility took a turn for the worse. Still with the VIX at 18.46 at the close there is plenty of room for a bigger correction – based on the trading range pre-Lehman’s, a spike towards the high 20′s is a reasonable proposition.
And what might drive such a move? The complacency in the market has been extreme of late meaning there is plenty of dry tinder lying about the place – witness the 20 day moving average in the CBOE PutCall ratio making new lifetime lows:
Another indicator that this selloff is likely to get up a head of steam is that volume spiked on the S&P500 on Friday – to its highest level since the indecision of May last year. History would suggest we can expect a few more high volume days – and they are typically down:
Another indicator to watch is the carry trade. For example, AUDYEN had been treading water for some considerable time failing to match the upside momentum in risk assets. It broke down on Friday, with plenty of room for a deeper retracement:
We could also look at indicators like emerging markets and commodities to see how they are faring. Suffice to say, John Taylor’s reading of the entrails might prove to be pretty timely. For mine, will look to add some long-side risk exposure if our doe-eyed risk index tips back through its recent February lows.
7 responses to Forecast – A serious bout of risk aversion with acid rain over Europe
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The put/call ratio chart is impressive. Is there some way to chart the ratio vs. say the S&P500?
Hey Justin,
I’m a fan of Stockcharts. Try code $CPCE with $SPX as the overlay. Alternatively, I can rummage up something with my super excel skills!
Thanks Rohan, I forgot about Stockcharts.
I had a look but it didn’t seem to be too useful, the put/call ratio is very ‘noisy’ when compared to an index. I see though that the ratio did take a big jump in just the last few days, which I presume is investors buying puts following the Goldman news and related market fall. It does indicate to a certain extent that it’s maybe not a leading indicator as such in the short-term, but long term trends are probably more useful.
As a quick daily check I’ll use Stockcharts – I typically look to 10 day MA and hide the daily noise. I have also downloaded the hard data from the CBOE. It means you can look to see whether its puts or calls that is driving the ratio. It’s usually more useful as a short term indicator at extremes – but recently the US market seems to be powering on regardless. Not sure if that means its broken – or that we are close to an absolute extreme (rather than one within a trend).
[...] 2) Investor bullishness was at extremes – as measured by sentiment indicators from newsletters to the CBOE PutCall ratio. A rapid switch of the greed to fear button will have longs questioning what is fair value for equities. (See DataDiary summary from 19 April here) [...]
[...] we have nodded to AUDYEN recently as an indicator to watch for the unwind of the carry trade (see here and more recently here). That positions have increased into the recent weakness in the cross [...]
[...] Posted on 03 June 2010 John Taylor at FX Concepts has timed the recent market rollercoaster better than most. We last noted his bearish call back on 19 April (see here). [...]