In a recent note, RBC Capital Markets equity derivatives strategist Amy Wu Silverman warned that the heat may be turning up on the markets without investors really noticing. Find out what she means and what to watch for in the video above.
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Here's my favorite part of your note, Amy. I love this part though. You say our concern for this market, have we moved from a paddling duck market to a lobster in a pot market, Amy? So paddling duck, maybe went to lobster and a pot, explained to us, Amy, what this means?
Yeah, clearly I like my animal analogies, but you know, up until the beginning of this year, the idea that we were in a paddling duck market kind of fit, right? We were calm and steady on the surface, we did get those violent rotations, but they were kind of underneath. And the issue right now is, yes, we've had a sell off, yes, we've had this March higher volatility, but the word I keep hearing traders use is that it's been incredibly orderly, and I don't disagree with that. But my question is, you know, are we slowly turning up the temperature? And yes, that's orderly, but at some point we're going to look at that lobster and he's been cooked. And that's just my sense of how we think about these risk metrics slowly marching up. We haven't had these convex gap down situations, but that doesn't mean your baseline year on year volatility metrics aren't getting higher and higher.
And Amy, what are those kind of signals that you're looking for that maybe we're getting close to that boiling point?
Yeah, to me it's not just about where the headline VIX is, that's still sort of sub that psychological 20 level. It's a couple different things, Julie. It's your volatility of VIX, so your VVIX is important. If that starts to pick up, you know, that's something that we should start to get a little worried about. The other is this idea of actual tails. I like looking at the TDEX, which thinks about essentially, if there's a three standard deviation drawdown on the market, what's the cost of protecting that? That again, that looks relatively sanguine right now, but if these really left tail situations start to pick up, uh, particularly, you know, very difficult to predict with the headline risk, I would start to think that perhaps we're getting closer to that boiling point for that poor lobster.
