The last time JPM’s head quant Marko Kolanovic warned about imminent market volatility was just two weeks ago, and was duly noted here in “JPM’s Head Quant Is Back With A Stark Warning: Volatility Is About To Surge; Here’s Why.” And, as has so often been the case, he was right: as he follows up in a victory lap note released moments ago, Kolanovic notes that “in our note on September 6th, we called for an increase in market volatility and deleverage of systematic strategies. A few days after, the volatility of US equities tripled and global equity markets were down between 2.5% and 5%. The pullback in US markets was smaller than overseas as S&P 500 price momentum held positive (CTAs didn’t go short the S&P 500) which we forecasted would be a stabilizing factor (in addition, there was a large idiosyncratic move up in Apple and related companies).”
That said, the selling was less than he expected: as Kolanovic notes, since “S&P 500 momentum held and short term volatility stayed below 20% (in part due to VIX investors rushing to sell around half of their long ETP exposure), the amount of equities sold was likely half of what was sold in August/September of last year.”
Another stabilizing factor was the low exposure of long-short equity hedge funds that did not have to sell (unlike last year). Another interesting development is that the liquidity of equity markets held up very well during the selloff. Equity market liquidity (as measured by futures market depth) was fairly high during July and August, and when deleveraging started on September 9th, liquidity dropped more gradually. The Figure below shows the relationship between market volume and market depth/liquidity for S&P 500 futures over the past year. One can see that during the most recent surge in volume (and selling) market depth was ~3 times higher than on 8/24/15.”
This post was published at Zero Hedge on Sep 22, 2016.
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