A reader asked for clarification on how a high or low yen impacts equities. Well, here is a funny answer; most of the time it does not matter but occasionally it does. Last spring, as the chart shows, the dollar started rolling over against the yen before the S&P 500 started its decline.
I have no idea, looking forward, how often currencies will impact stocks in a meaningful way but they can and that is the important thing. I think big moves, an upsetting of the apple cart, is what causes equities to react swiftly.
For anyone who cares I reinstated my position in DB Agriculture ETF (DBA) yesterday at $25.90. If the entry point turns out to be a good one, well lucky for me, if it turns out to be a bad one I will have taken out two points which is OK too.
Bill Cara has a post up that expresses concern about a rising ten year yield. He feels that 5-5.25% could be real trouble for equities. I'm not sure if it would be real trouble or simply an excuse for a correction but at some point when enough time has passed after 1% Fed Funds and because of all of the dollar issues I tend to think that the ten year will yield 6.5-7% again. I can't predict when with any confidence but I think it will happen.
The benchmark ICEX-15 index in Iceland has been perking up of late; interesting that the recent yen strength has not seemed to hurt Iceland. Yet?
Iceland has very high interest rates and so is a beneficiary of the carry trade.
This is a very long term theme for me personally but not for clients. I have ridden out a few bumps along the way and will continue to do so. A couple of weeks ago, maybe longer, I reinstated a position in the Stockholm listing of Kaupthing Bank that I had previously sold months ago.
I find it interesting that the rally in SPX on Wednesday took VIX below ten and immediately had a big down day taking VIX back above eleven. I don't have much of a rebuttal to anyone who says it means nothing but nonetheless.
6 comments:
Roger, Please tell me why a one day rally would decrease the VIX? I am trying to undersatnd something about technical elements and volatility is one factor I can see as predictive as well as rear view.
Now I have to figure out how it is derived....
people feel good or have a sense of relief or calm during/after a rally. This is often relfected in option premiums. If people feel better implied vol sometimes eases up. The opposite comes into play during a decline.
As far as figuring how it is derived, chances are you don't need to know the specifics, I do not. Generally it is a formula taking info from this months and next months options that are a little out of the money, at the money and a little bit in the money. Even then I may not have it right but not a crucial element for most folks, me included.
If rates are going up, not down, higher than the goldi locks scenario, then what is the driving force for reducing liquidity? Is it inflation of higher costs getting into the economy or is it a more roboust economy? If the latter, would the cylical type stocks do relatively better?
rising interest rates, by definition, reduces liquidity.
if the higher rates do not slow the economy down ie no consequence for reduced liquidity and growth resumes then yes I might expect cyclicals to do well. The bigger macro is cyclicals usually do well if the economy will be turning up.
The question though is will the fed allow GDP to pick up.
VIX has and inverse relationship to the S&P 500.
http://tinyurl.com/2lvfpz
Equity markets are more volatile at bottoms and tend to churn at tops. VIX reflects this in the Options market. I don't think the absolute VIX level is very important - I prefer to look at it's relationship to recent levels. The best way to use VIX (imo) is to watch for reversals from extreme levels.
trader vic's book discusses the Fed's action in controlling liquidity. The interest rate is but one factor.
The impact of the increased/reduced liquidity on the markets med/long term is VERY real.
Post a Comment