SOME NOTABLE MARKET ACTION

Some of the notable market moves from today’s action:

• Despite the down day in stocks the VIX still posted a down day.   So much for hedging your volatility with volatility….

• The US Dollar was up just marginally despite numerous calls from foreign governments regarding their currencies.  The dollar is looking more broken with every day.

• Goldman Sachs upgraded shares of Tenaris to buy and added the stock to their conviction buy list.  They raised their price target to $50 which is more than 25% above where shares currently stand.

• Goldman also downgraded Weatherford and removed them from their conviction buy list.  They reduced their price target t o$25.

• Barclays upgraded Ford to a buy and tacked on a $8 price target.

• Credit Suisse upgraded Family Dollar to a buy with a $34 price target.

• A massive investor in SPY continues to hedge their large position in the S&P:

SPY – SPDR Trust Series – It’s that time of the year when options positions have to be adjusted once again. And it was deja-vu all over again for the world’s biggest options trade as one institutional investor once again sought to maintain a huge protective option combination into the March contract. The trade involved a total of 720,000 put options with the investor trading in a December ratio put position for a fresh bearish look at the March contract. The investor was long 120,000 December 95 puts and short 240,000 December 82 puts. In July implied volatility was running much higher than today’s VIX reading of 21.45. Indeed the start of July marked the last time the fear-gauge extended above a reading of 30. Back then the S&P index at 875 was pretty close to the money. Now this investor is forced to take a hit from lower vega and theta at a significant expense to maintain this bearish position. In other words, eroding volatility and the passage of time as the market goes into overdrive is crucifying this trade.

Tim Backshall at CDR notes some bearish action in the credit markets:

Spreads were broadly wider in the US as all the indices deteriorated (with IG just underperforming HY as intraday ranges remained low but sentiment was definitely more skewed to the widening side). The last week or so has seen a shift in the relative-strength between debt, equity, and vol and based on this we would expect HY-IG decompression in the short-term and equities to underperform credit here (for equity guys a sell the rally rather than buy the dips mentality in stocks short-term).

The majority of credit curves flattened as the vol term structure steepened with VIX/VIXV decreasing implying a more bearish/more volatile short-term outlook (normally indicative of short-term spread decompression expectations), and additionally the ratio has dropped below 0.9x which is exceptionally bearish for stocks and spreads.