Todd Harrison: Russia, Twitter, Cannabis, and the Approaching Volatility Storm

By Todd Harrison  MAY 06, 2014 9:44 AM

Weighing the world one dynamic at a time.

 


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It's Turnaround Tuesday, which can only mean one thing for a tape that's been slithering sideways for the past two months: Volatility is coming.

While there's little indication it arrives today, it's a matter of time before the world gets wilder. Per the chart below, which we shared yesterday (thank you, Michael Sedacca), currency volatility, interest rate volatility, and S&P 500 (INDEXSP:.INX) volatility are compressed across the board.

That makes sense in a world where liquidity is artificially infused into the financial fabric -- volatility is the opposite of liquidity -- but not so much as the punch bowl is being taken away. 


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To be sure, the price action in the stock market has been the definition of resilient; despite a bear market in high-beta tech, the S&P remains a kitten's whisker away from an all-time high. The bulls will argue that as high-beta tech bounces (as it did yesterday), the coast will be clear to the upside. As the old saw goes, "The longer the base, the faster the chase," meaning once the sideways price action in a stock or index resolves, the move is typically swift.

As always, it's not that simple. While the S&P is the definition of range-bound, the financials and small caps remain in a pattern of "lower highs," which is a classic sign of distribution. 

And there's the matter of the Bloomberg SMART money index, which we've been tracking the last few weeks and updated below. Unless we see a sustained shift in behavior -- more presses lower in the first 30 minutes, followed by end-of-day ramps -- this is a pretty massive red flag.  Juxtapose that against the depressed levels of volatility and you have a one-two punch that's waiting to exhale lower.
 

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Random Thoughts:



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R.P.

Twitter: @todd_harrison

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Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at todd@minyanville.com.

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