Market opens in the red again, but turned quickly into the green, after a wildly volatile day yesterday that saw a 100 point swing on the S&P and 1100 points on the DOW, with both closing at the highs on the day. It erased half the losses from Monday. Both the S&P and DOW re-joined the NAS in the green for 2018. They might fall back in the red this morning. The NAS is the weakest of the 3 so far in early trading. The new-found volatility continues, something we expect to see for a while now. Volatility was absent last year. Its return in 2018 sent shockwaves throughout the financial system. The S&P 500 Volatility Index, known as the VIX, had its largest one-day increase ever yesterday. The VIX is called the “fear indicator”. The VIX spent most of last year at 10, and reached an all-time low of 8 in November. Historically, normal is around 17. It spiked to 50 this morning, a level not seen since the flash crash in August of 2015. It closed yesterday at 30. There is a great deal of new fear built up. There was no fear last year. There was great complacency. Many institutional and retail traders kept pressing the VIX lower in January, making big bets against volatility. It’s entirely possible that some of the traders didn’t fully understand the details of the products they were trading. It was the calm before the storm. The crowd tipped the scale last week. The damage speaks for itself. It is so critical to know what you own. The danger with leverage is, if it goes against you, the need to raise cash arises immediately and often times you can’t sell what you want, you have to sell what you can. That was certainly the case with stocks Monday, and selling created more selling which caused a bit of a stampede effect. Most importantly, in our work, the Credit Market has behaved very well throughout this process. Corporate Bonds are showing no signs of stress in the system. The Bond Market is generally the first place that signs of a systemic crisis is coming. In previous deep corrections, spreads widened in the Bond Market as investors demanded to be compensated for an increased risk. That is not the case right now. We follow it very closely. We still believe the underlying fundamentals are very strong for Global Markets. Keep those belts buckled.
Have a great morning,
Mike Frazier
