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Under the Hood: What's Happening At the Stock Market's All-Time Highs - repair

Below is a brief excerpt from our daily market video broadcast The Macro Show in which Hedgeye Macro analyst Ben Ryan explains what's "underneath the hood" in global equity markets:

Stock Market Volume

So let’s look at some under the hood market data from yesterday. You had all-time highs in the S&P 500. There wasn’t a huge rip to the upside but volume was nonetheless healthy all things considered. Volume was up 7% versus the prior day but up 14% to 15% versus 1-month, 3-months and even up 15% versus the 1-year average. That continues to give you a healthy sign of breadth with a market at all time highs.

Under the Hood: What's Happening At the Stock Market's All-Time Highs - volume 9 19 17

Stock Market Volatility

You’ve also seen this absolute crush in volatility. You’ve had the deepest implied volatility discounts across equities. Some of these volatility indices are at all-time lows and the market is projecting this out into the future. We can see this in futures and options markets. This is a snapshot before the open yesterday. All these volatilities have been crushed. That Russell 2000 implied volatility is at the lowest level going back to 2008.

(Editor's Note: Implied volatility is the market's forward looking expectations for volatility implied by the options market. An implied volatility "discount" means forward looking expectations of volatility are trading below where actual back-ward looking volatility has traded historically.)

Under the Hood: What's Happening At the Stock Market's All-Time Highs - 09.19.17 EL Chart

In the next slide you can see, the whole story here. This is only the top ten. But you have 15 global equity indices that have near-term volatility expectations (implied volatility) at all-time lows.

(Editor's Note: A "percentile reading" of 60%, for example, means the current volatility reading is greater than 60% of all the other historical readings in the sample. A reading of 0% means just about none of the readings are higher. Talk about super low volatility!)

Under the Hood: What's Happening At the Stock Market's All-Time Highs - imp vol 9 19 17


After moves in equity markets you typically see this pop in contract positioning. You see that in the net long contracts in the S&P 500 E-minis. You see the top end of the risk range (a scenario that in our proprietary quantitative ranges, all else being equal, triggers an immediate-term "sell" signal). Then you see this crush in volatility. You have to be cautious near-term because in the short term these start to be crowded trades. 

Want to learn more about how we analyze volatility? Watch Ryan in the video below.