Which Fear Indicator is at its Highest Level Since October’s Market Turmoil?

Equity markets continued their slide today, gyrating wildly and reversing overnight gains in stock futures. The drop is not entirely surprising given the current backdrop of Fed tightening in mid-2014 and a European economy one hair away from recession. We believe that the current drop has been exacerbated by the unwinding of carry trades, as the declines in stock markets have coincided with weakness in the Dollar, especially against the Japanese Yen which is a favorite borrowing vehicle for speculative carry traders.

SPYThe volatility of the VIX (vol of vol or VVIX) reached levels not seen since the October 15th blow-up:

Vol of Vol

Vol of Vol

VVIX is an important indicator of overall market stress, because vol of vol represents the markets own certainty in its perception of reality. The higher VVIX, the more uncertain market participants are that they can trust their own thoughts and perceptions of the market. High vol of vol means it is very hard to hedge your positions as volatility itself is swinging wildly from day to day. The market is increasingly in a binary system of volatility or no volatility: some days are wild gyrations and others you wonder if the market is even open you have to blink your eyes at the screen so many times.

Given the uncertainty surrounding this week’s FOMC meeting, the last of the year, we expect markets to remain wobbly going into Wednesdays statement.

Categories: Markets

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