Correlations closed the week at .95, the highest level of the sell off thus far.  They have spent the last ten days above .90.  On Thursday, VIX printed it’s fourth highest print for the data we track at just under 75 (the dark blue dot just North West of the pink dot.

Implied volatilities are now well over the 95th percentile realized volatility values and have been the past two days.  This is evident from the Volatility Cone where the top blue band with starred points indicates the level you would expect realized volatility to settle lower 95% of the time.

The volatility curve front month future has printed 2 all time highs since the beginning of our data set – even with the 9% rally and the volatility sell off on Friday.  In the chart below we show backwardation historically via the red lines, and contango via the blue lines.  The white lines show the last month of data with the large rectangles the most recent day, the small rectangles 2 days prior, the dots 1 week prior and the 1 month prior as a solid white line (currently at the bottom of the chart).  This chart and the overlay with SPY have been added to the bottom of the PDF.

On Thursday, we also had the most illiquid day in the past 50 days which calculates the SPX component liquidity as a function of daily return to dollar volume.  In the sell-off this has now led to 2 successful one day bounces and two failures.  This ratio has stayed effectively in the high 90s percentile of the past 50 days for the entirety of the sell off.

Likewise on Thursday – for the first time of the entire sell off, our regime switch indicator triggered.  This indicator is simply a ratio of VIX to average sector correlations, and triggers above the 95th percentile of the past 50 days (ie. VIX was only higher relative to average correlations 5% of the time in the past 50 days).  On Friday this indicator is still flashing above the 95th percentile.  We think that evidence is starting to mount a bottom may be forming.

However…. last week we spoke heavily about the relationship between implied volatility and 30 day historical realized volatility pinging back and forth violently intra day and on a closing basis, which led to very heavy fades of these extremes.  That remained the case this week – and unfortunately on close as of Friday as well.  Until this ratio quits pinging back and forth violently we think it is safe to say at the very least there will be extreme chop.  Friday closed at the 1st percentile, ie. VIX (57.83) has only been lower than the current realized volatility (69.66) 1 percent of the time using all available data.  Again there is no good reason, when volatility is this high – for such extreme disconnects to exist – they get faded violently. Therefore we think Friday marked a short term top (for more on this discussion see last week’s post).

Not much to add apart from this, we will be building out more analytics to include in the report over the coming weeks. Any suggestions, please comment or email us.

That is all for now.