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Volatility Signal Flashes Red, Even as Stocks Rebound

Jan 8, 2019

Observations & Insight

What’s In Style? Member’s Exchange Brings Together Wall Street Behemoths To Take On Nasdaq, NYSE and Cboe Global Markets
Jim Kharouf – John Lothian News
So many marketing opportunities, so little time for the latest US stock exchange called the Members Exchange (MEMX).
The newest stock exchange, with its nine behemoth investor banks, brokers and market makers, could get a good deal at the Sears closeout sale on Member’s Only jackets and slip a “best road trip songs” on a Memorex cassette into the vest pocket. You’re welcome, soon-to-be-announced MEMX management and marketing team.


US government shutdown deprives markets of key data
Gregory Meyer, Richard Henderson, Sam Fleming and Kiran Stacey – Financial Times
Investors, policymakers and even farmers are being deprived of key economic data as the partial US government shutdown moves into its third week.
Funding for agencies deemed “non-essential” lapsed on December 22 amid a political stand-off over President Donald Trump’s proposed border wall. About 800,000 federal employees are affected.

****SD: Due to the government shutdown, the FIA just sent out a notice that the release of its FCM tracker would be delayed as the CFTC isn’t publishing the reports it is based on. There was no Census Bureau report on trade today. There is no WASDE crop report Friday. The longer the shutdown goes on – 17+ days thus far – the more the effect is being felt. See NYT’s As Government Shutdown Persists, Americans Feel the Bite.

Lead Stories

Volatility Signal Flashes Red, Even as Stocks Rebound
Gunjan Banerji – WSJ (SUBSCRIPTION)
The rebound in U.S. stocks since Friday hasn’t convinced all investors that volatility in the market is over. The S&P 500, Nasdaq Composite and Dow Jones Industrial Average each climbed on Monday, continuing a rally that started at the end of last week after a strong jobs report and comments from the Federal Reserve that the central bank isn’t on a fixed path to raising interest rates.But the futures curve tracking Wall Street’s “fear gauge,” the VIX, remained inverted Monday, with contracts expiring in the near term more expensive than ones dated further out in the future—an indication that some investors expect wild price swings to continue.

****SD: Current term structure

Interactive Brokers Group Will Appoint Milan Galik as CEO; Thomas Peterffy, Founder, Will Step Down in Third Quarter of 2019 and Remain as Chairman of the Board
Interactive Brokers Group, Inc. (IEX:IBKR), announced today that it will appoint Mr. Milan Galik as Chief Executive Officer of the Company, succeeding Mr. Thomas Peterffy in this role. Mr. Peterffy will continue as Chairman of the Board and remain closely involved in the operations of the company that he founded. These changes will occur in the third quarter of 2019, concurrently with Mr. Peterffy’s 75th birthday. Mr. Galik has been with the Company for 28 years and has served as its President since 2014. Mr. Galik has been a member of the Company’s Board of Directors since its initial public offering in 2007.

Four Option Trades Leave Marks of $1 Billion Stock Liquidation
Gregory Calderone – BloombergQuint
A series of U.S. options trades over the last few days have the fingerprints of institutional investors exiting big stock positions while preserving their ability to profit from rallies.
While nothing in the markets is ever 100 percent certain, the transactions have identical profiles and would be consistent with a strategy sometimes employed by big fund managers or other large investors to raise cash to meet client redemption.

Citadel Hedge Fund Said to Gain 9% in Strong Multi-Strategy Year
Hema Parmar and Melissa Karsh – Bloomberg (SUBSCRIPTION)
Big multi-strategy hedge funds found a way to make money in a tumultuous year when so many other firms floundered.
Ken Griffin’s Citadel, which runs more than $30 billion, rose 9.1 percent in its flagship Wellington hedge fund last year, and Izzy Englander’s $35 billion Millennium Management gained nearly 5 percent, according to people familiar with the matter. Hudson Bay Capital Management, which manages $3 billion, returned 6.5 percent, another person said.

****SD: Speaking of big funds, see below FT story.

Renaissance joins big hedge funds in defying 2018 gloom
Robin Wigglesworth and Lindsay Fortado – Financial Times (SUBSCRIPTION)
The flagship investment vehicles of Renaissance Technologies, Two Sigma, Citadel and DE Shaw notched up hefty gains in 2018, underlining how some of the hedge fund industry’s biggest names have managed to thrive despite renewed financial market turmoil.

United States: Finance Professor Says New Technology Not To Blame For Market Volatility
Bob Zwirb – Cadwalader, Wickersham & Taft LLP
University of Houston Finance Professor Craig Pirrong rejected current conjecture that recent market sell-offs are due to technology, such as automated, algorithmic or high-frequency trading.
In a recent blog post, Professor Pirrong addressed concerns that increasing automation is responsible for a lack of liquidity during downturns, stating “by virtually every measure, the increasing automation in markets has led to greater liquidity.

US Stock Market is Made of These!
Alphacution Research Conservatory
In August 2018, I did what I rarely do anymore: Cut an article out of a newspaper. The title and topic caught my eye, and eventually became the catalyst for some of the analysis presented here. Amongst all the digital gear, I still needed a physical marker to remind me…

****SD: Context on the stock market provided via looking at the growth of other asset classes.

Exchanges and Clearing

Why Wall Street Wants to Build Its Own Stock Exchange
Bill Alpert – Barron’s (SUBSCRIPTION)
The stocks of America’s big trading exchanges got shaken Monday by the announcement of a new competitor. As nine big Wall Street firms unveiled plans to form a stock exchange called MEMX, stock in the incumbents fell, in an otherwise rising market.

****SD: A Members Exchange, a Small Exchange – what’s in the cards for options? (Other than the surprise departure of Chris Concannon from Cboe to MarketAxess.) We already know MIAX’s new exchange is coming.

New Stock Market Exchange Is an Old Nightmare for Wall Street
Stephen Gandel – Bloomberg Opinion (SUBSCRIPTION)
Often, despite nostalgia, memory lanes don’t lead us back to better places, just the same wrong turns we’ve made before. That would be the case with Wall Street’s latest proposal to improve the stock market. The Securities and Exchange Commission should see it for the unsensible stroll it is.


High-speed trader Virtu parts ways with Europe chief Scholtes; Virtu is awaiting completion of its $1bn acquisition of ITG
Samuel Agini – Financial News (SUBSCRIPTION)
Virtu Financial’s head of markets in Europe, the Middle East and Africa has left after more than six years at the high-speed trader.


Q4 2018 Performance Review for the S&P Risk Parity Indices
Rupert Watts – S&P Dow Jones Indices
As the ball dropped this New Year’s Eve, most investors were more than happy to bid adieu to what proved to be a volatile end to 2018. The fourth quarter began with the October sell-off, which was just the start of a highly volatile quarter. The S&P 500 fell almost 7% in October alone, with losses accelerating into the end of the year during what is likely to be one of the worst Decembers on record.

S&P 500 Likely to Report Earnings Growth Above 15% in Q4 2018
John Butters – FActSet Insight
As of today, the S&P 500 is expected to report earnings growth of 11.4% for the fourth quarter. What is the likelihood the index will report an actual earnings increase of 11.4% for the quarter?
Based on the average change in earnings growth due to companies reporting positive earnings surprises, it is likely the index will report earnings growth above 15% for Q4, but below the 25% growth reported in the previous three quarters.

Defensive “Buffer Protect” Option Strategies Can Help Investors Stay the Course
Karan Sood – S&P Dow Jones Indices
Equities have historically offered promising growth potential, but we have seen time and again how suddenly and severely the equity markets can be affected by events that are difficult to predict, and 2019 is not likely to be an exception. Losses can have a greater impact on portfolios than gains because the money remaining after the loss must work hard to recover just to break even.

Why Recent Volatility Could Be a Bearish Signal for Stocks
Bloomberg (VIDEO)
On this edition of “Options Insight,” Bloomberg’s Greg Bender discusses the recent performance of U.S. stocks with Bloomberg’s Abigail Doolittle on “Bloomberg Markets: The Close.”

Buying into the market’s ‘First Five Days of January’ indicator is a mistake
Mark Hulbert – MarketWatch
Should you care if the Dow Jones Industrial Average on Tuesday, Jan. 8 closes above where it ended 2018 — at 23,327.46? If you are believer in the famous (or should I say “infamous”) “First Five Days of January” indicator, your answer is “yes.”
According to this indicator, the U.S. stock market’s 2019 result will follow its direction over these first five trading sessions. With four of the five trading sessions already complete, the Indicator is leaning bullish: The Dow DJIA, after those four days is ahead 204 points, or 0.9%.
Yet if you are a student of history, your answer is a resounding “no.” This five-day indicator rests on a surprisingly flimsy statistical foundation.


After Multiple Hikes, Could Fed Resort to Cutting Rates Next?
Bluford Putnam – CME Group (VIDEO)
The Fed might be at the crossroads of whether to continue raising interest rates or stand pat in 2019, with some expectations for even a rate cut in 2020.

Brexit Spurs $1 Trillion Asset Moves to EU From London, EY Says
Silla Brush – Bloomberg (SUBSCRIPTION)
Banks, insurers and money managers are planning to move about 800 billion pounds ($1 trillion) of assets from the U.K. to the rest of Europe as Brexit uncertainty takes its toll, according to a survey conducted by EY.

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