Weekend Reading: The Next Leg of the Bear

Sun, Aug 10, 2008 | Jared Woodard


Random Roger, following up on the 300-point rally meme, agrees that during bear markets, there does tend to be more volatility.  Remember, volatility doesn’t necessarily equal whatever is happening (or not happening) in the VIX.  And more importantly, volatility doesn’t equal large-size selloffs – monster one-day rallies are constitutive of volatility, too!

Adam has had enough of people deriving some major magical causal link between the price of crude and equity rallies.  We couldn’t agree more – oil-related stories are always great fodder for playing the Correlation Game.  See David Gaffen at the WSJ on why the short financials, long energy trade is basically over.

Greg Feirman argues that we’re entering a second stage of this bear market, in which the effects of US troubles are felt more across the globe:

What this could mean is that we are witnessing an evolution in the bear market as the global economy and investors begin to reckon with the second order effects of the US housing bust. [...] What this probably means for financial markets is that commodities, emerging markets, infrascture plays, etc… which have until recently been so strong are now broken and will lead on the downside. Financials and consumer discretionary stocks might not be strong but they will no longer lead on the downside.

A note from Goldman Sachs on Friday made basically the same point:

There are two reasons behind the USD rally overnight – a two plus standard deviation  event – which has caught many by surprise as the USD rally has been “nascent” all week and has seemingly grown up in 24 hours.  The logic behind the move is based on the EUR move reflecting European weakness acknowledged by Trichet yesterday and leading to the view that the ECB is done with its hikes.  The second supporting argument for the USD rally comes from a global slowdown.  Markets are concerned about China – and a post Olympics let-down.  Many see more pain in Asia bleeding back to Europe and making the US look like value by comparison.

We’re definitely not getting long US equities in any meaningful way.  If we do see a second phase of the bear, marked by downside leadership from the rest of the world rather than the US, it should provide the ideal test for (and perhaps the final nail in the coffin of) the ever-popular “decoupling” hypothesis.

Members, be sure to check out this weekend’s portfolio update.

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  1. August Monthly Review | Condor Options: Iron Condor Trading Newsletter Says:

    [...] or by energy prices per se, but rather by the effects of the American slowdown being felt by the rest of the world.  A front page story in the WSJ on Friday noted the falling Eurozone GDP as additional evidence of [...]


Jared Woodard specializes in trading volatility as an asset class. With over a decade of experience trading options and other volatility products ... Read More


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