By
Peter Tchir
:
If a Stock Doesn't Trade, Does it Make a Sound?
There is a lot of talk about
low volumes
and what that means. There's also a lot of chatter about a low VIX
and what that means. I don't pay much attention to each. I watch
them, largely because others do, but don't rely on them too
much.
VIX is NOT a "Fear Gauge" and has NO Predictive
Value
I have looked and find no useful predictive value from VIX. It
may have had some value at one point in time, when only a few weird
little quants in the corner took the time to figure it out and
traded on it. But that was a long time ago, and its value as a
leading indicator has dropped along with the ability to smack it
down by hitting VIX futures, or lifting it higher by buying TVIX
and other VIX related ETF's.
(click to enlarge)
That is probably not the most common VIX chart you will see
today. It doesn't tell the whole story, but it does tell a useful
story. From January 2004 until July 2007, VIX spent most of its
time below 15, getting as low as 10, and only had brief spikes
higher, and 24 was considered a big number.
I'm not sure that we are ready for that yet, but I am sure that
we spend too much time looking at recent memory. There is a strong
tendency to want to "revert to the mean" but too many people often
use near-term means rather than longer-term means.
I pay more attention to recent changes in VIX than to
absolute levels.
We saw spikes ahead of big weekends and NFP that led me to believe
the market was well protected. Right now, it looks like the market
is getting complacent as VIX continues to slide while stocks remain
in a very narrow range. This is tricky since VIX should be what
investors are willing to pay for volatility, and reduced "realized"
volatility should cause VIX to go lower. But it is a warning sign
that this rally is getting more susceptible to a decent
pullback.
(click to enlarge)
So
here is the "realized" volume of the S&P 500 for the
year.
The 20 day is just below VIX. The 5 days is extremely low. This
does support that VIX is moving down with volume as much as
anything and maybe is a reason that low VIX doesn't imply impending
doom. The impact of volumes has to be considered.
Volumes and What Generates Volume?
Somewhere deep down, many of us want to believe that one
investor enters a buy order, and some other investor responds to
that buy order and sells it to them, "like the good old days". For
better or worse, that is not how the market works.
Some "HFT" programs or "algos" require volatility to make
their strategy work
. This inextricably ties volumes to volatility. The best example is
"ETF" or "Index" arb. Computers plugged directly into the exchanges
(they pay the exchanges special fees to be located physically
closer) look for minute discrepancies where they can piece together
the stocks in an ETF versus the ETF itself. At times of high
volatility, this can occur frequently. This spike in volumes isn't
a result of more investors needing to trade, but of computers that
spot and capture the inefficiencies quickly. I have no problem with
this particular type of HFT but it does influence volumes. Whenever
we see decreased volatility, volumes drop, at least in part because
of this. It seems, from my seat, that financials and the [[XLF]]
are a favorite of these programs because the volatility has been
high and the ETF relatively small.
Order "Disguise".
Away from things that I find odious, such as sub-penny churning,
exchange paid rebates, flash orders across multiple exchanges,
etc., some of the HFT's are designed to help clients get better
execution. The programmers and users feel that they can get better
execution on large blocks using these programs. Some of these
involve both buying and selling to accumulate a large block. Rather
than just buying a million shares, the algo will accumulate that
over time, but will sell shares as well as buying in an effort to
hold down prices. Some trades will be purposefully deceptive so
that other algos that "sniff" for large blocks to front-run, can't
discern those orders. That makes sense and is a strategy many
humans will follow. It does mean that every order, say for a
million shares, may generate 1.2 million buys and 0.2 million
sells. So each order has a multiplier effect, before adding all the
sub-penny and flash order "subterfuge" that goes on. As real
clients have less to do, the volumes drop further.
Knight Capital Group.
If you think that the drop-off in volumes has nothing to do with
Knight Capital Group (
KCG
) pulling back their operations, or other similar computers being
checked out for problems, than you are probably naïve. Maybe the
NYSE's idea to put in its own dark pool program, that was
introduced the day the KCG computer went haywire, also has had an
impact. A little "law" in the "frontier" goes a long way.
Volume, Volatility, and Positioning
Nothing about the 'vol and vol' argument changes my current
status. I continue to be long about 20% to 50%. I continue to favor
Europe and banks. I continue to believe that the broad U.S. market
is more susceptible to a pullback than the European ones,
especially as the campaign heats up. I think CDS' can do better
than bonds in terms of performance here. I don't like "safe haven"
bonds, particularly in Europe, but even here. High Yield bonds
remain in the territory where the only significant performance to
be gained is by moving to "story" credits. That should be coupled
with a move down the liquidity curve. The liquidity premium is too
high still, and the best value remains in off the run bonds, names,
and CDS.
Disclosure:
I am long [[SPY]], [[EWP]], [[HYG]], [[JPM]].
Additional disclosure:
Positions change frequently
See also
Pfizer Repositions Itself To Stay On Top
on seekingalpha.com