Thankful for….Low Volatility??

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It was “risk-on” across asset classes this week:  Market Psychology (MP) reversed higher Friday November 16…I think this week’s rally was a correction in the decline that began Sept 14…but…it may be the beginning of a bigger move…and if that’s the case then Nov 16 will become a Key Turn Date in MP.

At the Nov 16 lows the  DJII had fallen over 800 points in 8 trading sessions following the Obama win…MP was very negative with the “fiscal cliff” looming, perceptions that the European crisis was worsening, the global economy was weakening  and Mid-East tensions were rising.  Into this very negative environment a spark of hope came with the “news” that there might be a “breakthrough” in the political impasse over the fiscal cliff…the DJII rallied 130 points from 5 month lows and then continued to rise this holiday week…closing Friday 529 points above last Friday’s lows.

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Major global stock indices: Everything was higher… with the “worry index” the VIX near 5 year lows.

Major currencies: The Yen fell against everything, the US Dollar fell against everything expect the Yen and the Indian Rupee, the Euro rose and the Aussy was the strongest of all…extending a great run Vs. the Yen. Implied volatility on the major FX pairs (save the Yen) dropped to a 5 year low.

Major credit markets: Interest rates rose and implied volatility dropped to near 5 year lows.

Gold and Silver: closed the week at their best levels in a month…gold was up $100 from its pre-election lows…gold implied volatility hit a 7 year low. Gold shares gained a bit against gold after falling hard since the beginning of the month.

Energy markets: WTI and Brent crude were about $2 higher on the week, Nat gas, heating oil and gasoline were all higher…Crude option volatility is near 10 year lows.

Why is implied volatility so low? You’d think that with the DJII down 800 points in 8 days and then back up over 500 points in 5 days that VOL would be high…but it’s not just the equity market…VOL is historically low across asset classes…is it a function of traders trying to generate income by writing options across the board? IsT the “fear level” that low? I don’t know the answer…but I notice and ask, “Why?”  I’m always looking at markets, particularly as they relate to one another, and asking, “Why is that?” It’s part of my trading process. I’d say that nearly all of my best trading ideas have started from asking, “Why is that?”

Video Link: here’s a link to the Kyle Bass Blog:  http://kylebassblog.blogspot.ca/     The 7 minute interview with Kyle is great…as are a number of other videos on the sidebar.

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avatarVictor Adair - Victor Adair posted Friday, November 23rd, 2012.

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