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Bond and Stock Market Volatility Is Collapsing Post-QE3

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If history is any guide, investors getting long that trade are flirting with disaster.

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I'm on the record as having been bullish for a long time. But when scared money gets long, I start to get cautious. The catalysts of extreme bearishness and skepticism that have been behind this rally are finally starting to wane. There could be more room to run, but we are in the late innings of this move and this is where it could start to get turbulent. Instead of subscribing to this QE III equals risk-on nonsense, I believe it's time to start playing defense.

I mentioned that implied volatility in the bond market as measured by the MOVE index was collapsing. You all know implied volatility has collapsed in the stock market as measured by the VIX, which has to be the most watched market indicator. I looked at both the VIX and MOVE together and rarely have they both been on their respective lows at the same time as they are now. The last time that was happening was in 2006 into early 2007.

So you are getting investors long both stocks and bonds predicated on what I believe is a false premise that QE III is bullish for risk assets. At the same time, both markets are short volatility into a potentially very volatile environment with inflation premiums on the rise. If history is any guide, investors getting long that trade are flirting with disaster.

Twitter: @exantefactor

No positions in stocks mentioned.
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