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Paratrade Systems Weekly Research News

19 Dec

Is this Christmas 2015 redux?

Last year we moved toward the end of the year with a very low fear level and bond prices falling and stalling. The result was an equity gauge near zero by December 23.

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The further we get away from a meaningful trauma event the worse it is for the market. We can measure the fading impact and other papers have gone into detail about PTW’s – Post Trauma Windows. Here’s what this looks like now:

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The fear spike from the election was greater than the spikes prior to the Dec. ’15 top but we are now thirty days away from that spike. After 35 days the memory begins to fade even more significantly. We are currently on day 30. Everyone who has bought into the bullish new policy stories of tax cuts for all should be in by Dec 25. Around that time there are two things that can save us – a new rise in fear or a bond rally. These two things often coincide.

So why is the equity gauge above its year end levels of’15?

It comes down to one factor – (lagged) bond market volatility. Normally when bonds rally their measured realized volatility declines. You can see that here:

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Since a rise in bonds prices is good for equities, we want to see bond volatility decline. We can see how reliable this is at S&P tops and bottoms when we flip the indicator upside down:

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This won’t work all by itself but it is a valuable factor. For it to match up with the Dec. ’15 bearish levels we need to see bond volatility fall from current levels. If it doesn’t then we will need lower lows in SynVix and/or we’ll need to be even further away from the election. All these conditions seem likely to appear after Christmas.

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