Phew! The panic is over. Global markets are back and the flap that culminated in the second week of February is a dim and distant memory. So what have we learnt from the huge and unprecedented volatility of the first three months of 2016?
I fear, not a lot.
Don’t get me wrong. I have no issue with the fact that markets have rallied in some cases over 10 per cent from their 11 February lows. In fact, the panic valuations in some areas such as European banking stocks, miners and the oil price itself looked ripe for a bounce, and I doff my cap to the brave guys and gals in the market who dipped their toes when all about were shrieking about armageddon. I certainly didn’t see the bottom when it came and fortune this time round has certainly favoured the brave.
Let’s face it, Jamie Dimon’s 11 February bottom will go down as the key turning point, and the brash boss of JP Morgan deserves a lot of plaudits for plonking his own cash on the table and calling it like he saw it.
Looking at some of the numbers, it’s been stunning. Oil has rallied over a third, the Dow Jones has gone up for five consecutive weeks, and coming into this week the S&P was less than 4 per cent from its 20 May intraday all time high.
And yet for all the big recovery statistics out there, which may or may not turn out to be temporary, there is one measure which I can’t help thinking is clearly the wrong price given everything that has happened – the VIX.
For those of you who don’t know, I am a fully paid up member of the ex-Liffe Old Option Foggies Club. We are a strange archaic bunch who used to treat volatility as an asset class to be traded like any other asset, i.e. bought when low and sold when high (in an ideal world).
However, we are an endangered species, especially in the days of central bank manipulated markets. We are laughed out of trading rooms for suggesting that owning insurance premiums when they are trading at multi-month lows is a worthwhile exercise.
“Owning a decaying, limited lifespan asset that will only cost me money if the market stays where it is or goes up? Are you an idiot? Why would I do that? It’s an indicator of fear, you know, and I have none!” they tell us, adding, “You can stick your jibber jabber vegas and thetas and put them up your, your... well don’t you know we’ve had the Dimon Bottom? All is rosy now.”
So in spite of the VIX and other insurance products trading at lows not seen since November 2015, nobody is thinking of picking up some cheap trading gamma. Note I say trading rather than a buy and hold strategy for owning options.
It’s the same every time and will forever be the way of it. When we are going up they sell insurance policies, squeezing every drop of juice out of the short premiums, and it’ll be the same when we go down again and they all go on again about owning indexes (indices for you Latin scholars) of fear.
In short, if you want to see how short-term the global marketplace can be, look no further than volatility indicators where the same mistake occurs cycle after cycle after cycle, often within only a couple of months.