Flash Public Research Note: Equity Market Volatility
Public Research Note
VIX up ~28% so far today! Clearly some sophisticated people are getting damn nervous and pre-buying some very bad news. IMO, the VIX is only a low risk buy at this level if you believe we’re about to get bad news on the order of Oct 2008 or Sep 2011. Unless we get that news, I believe the VIX will drift back down into the mid-teens when the dust settles over the next few days. I don’t suggest buying into a one day explosive movement like this…without the corresponding explosive news. The only thing that will generate a reasonable risk-adjusted gain on the VIX from this level is exceptionally bad, almost black swan news…rarely a good strategy to forecast and bet on near term black swan events.
RE: China market: Let’s not forget that despite the major losses of the past few months, the Chinese markets were up ~135% TTM just a few months ago, and these losses have cut the massive gain to ~60%…the retail Chinese punters who drive their market have still had a great year, and would have to still feel some degree of a wealth effect (albeit shaken and cautious) that would find its way into their economy to some extent in the near future. I don’t believe the central planners in Beijing will allow the small Chinese punters and their wealth effect on the economy to get wiped out this year. In the centrally-planned Chinese economy, the gov’t can and will intervene aggressively in the markets to make sure of it. No need to freak out on slowing Chinese growth today…as it seems the markets are doing.
If you want to reduce exposure to equities, fine, but I wouldn’t play this by an extremely speculative roll of the dice on further near term VIX upside. My suggestion is to short the VIX today, take profits next week, then perhaps…perhaps go long VIX when it’s back in the teens and you believe moderately bad news is imminent…that hasn’t already been priced into the market.
NY, NY 21 Aug 2015