The spread between WTI and Brent crude is now at record levels of more than $14, a major boon for domestic refinery stocks.
Comments »Is Volatility Broken? Normalcy Bias and Abnormal Variance
The financial markets have endured a flock of geopolitical “black swans”including the devastating earthquake and nuclear crisis in Japan, widespreadrevolution and violence in the Middle East and North Africa, and escalation of theEuropean sovereign debt crisis. Incredibly domestic markets shrugged aside fearfrom each transformational event as stocks registered their best first quarter in overa decade led by a recovery in corporate earnings and job growth. The absence of sustained price volatility despite several global shock events is interpreted as abullish omen by many investors. In regard to geopolitical risk it feels like volatilityshould be perched above 30%, but surprisingly, after increasing in mid-March, theVIX index registered its second largest drop in history (and the third longest) falling-40.86%over seven days and ending the month below historic averages.
The passive mood of spot volatility is masking a dramatic revolution in the structure and behavior of the volatilitycurve that has wide-ranging ramifications for anyone who trades variance or uses portfolio insurance. The timing of recentvolatility distortions has coincided with the implementation of the Federal Reserve’s second quantitative easing programand is likely an unintended consequence of loose monetary policy.
In an increasingly volatile world many investors are talking about how to protect their portfolios against the black swanevent. What may be more relevant is to explore the psychology of a market that fears the black swan but refuses toacknowledge its presence upon arrival. In behavioral psychology this is called a “normalcy bias” and the concept provides aframework to understand the current volatility market.
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If prices for gasoline climb and driving trends tank you can probably entertain shorts in hotels/resorts, Las Vegas, restaurants, etc….
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