Silver as an investment

“We May Be Very Close To The Turning Point”: Selloff Blamed On This Note From JPM’s Marko Kolanovic / by Tyler Durden / Jul 27, 2017 3:52 PM

While nobody knows what catalyzed for the sharp selloff over the last hour, with Citi blaming it on Acrophobia, or fear of heights, saying  that “US equities opened at record highs, key levels were being approached in fixed income while USD enjoyed a bid across the board… However since then, it looks like markets have gotten a small case of cold feet”, Bloomberg had a different idea, when it observed that stocks erased gains around 12:30 p.m. as S&P 500 fell 0.5% over 60 minutes to low of 2,469.51. It notes that the “weakness occurred as traders circulated a note by JPMorgan quant strategist Marko Kolanovic that cautioned investors on the risks of record-low volatility in the equity market.”

In his latest note, reposted below, Kolanovic, aka the JPM quant “Gandalf” popularized on this website over the past two years writes that “volatility near or at record lows by a handful of measures should “give pause to equity managers,” and that “low volatility would not be a problem if not for strategies that increase leverage when volatility declines.”

 “In what is akin to the law of ‘communicating vessels,’ once inflows in bonds stop, funds are likely to start leaving other risky assets as well, including equities. The FOMC statement yesterday alleviated immediate fears – normalization of balance sheet will start ‘relatively soon,’ but only if ‘the economy evolves broadly as anticipated.’ This reasonably dovish stance pushes this market risk out for a few weeks (the next ECB meeting is Sep 7th, Fed Sep 20th, BoJ Sep 21st). This gives volatility sellers and other levered investors a limited window to position for a seasonal pickup in volatility and central bank catalysts in September.”

For the TL/DR crowed, picking up on an article posted here two days ago in which MS explained what would happen if VIX went “bananas“, Kolanovic writes that “strategies that boost leverage when volatility declines, such as option hedging, CTAs and risk-parity, share similar features with the dynamic ‘portfolio insurance’ of 1987,” which “creates a ‘stop-loss order’ that gets larger in size and closer to the current market price as volatility gets lower.”  Additionally, growth in short-vol strategies suppresses both implied and realized volatility, and with volatility at all-time lows “we may be very close to the turning point.”


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