When I see a market like the one we have now, I am always looking for a signal that the volatility event is nearing its end.  This could come from a number of different sources: a technical signal in the charts, a support level holding, a news blurb, a large block trade, or a correlation trade.  It’s not always easy to find the key.  That’s what makes trading a full-time job, and not an easy one.

And I think we have our signal that we are close to the end.  It’s coming from bonds.  Let’s look at TLT:

As you can see, the price of bonds is sky-rocketing today.  Yields are plummeting.  Fear has fully gripped the global bond market.  On top of this, we are seeing an INSANE level for implied volatility in bonds:

*From LiveVol Pro

For those unfamiliar with implied volatility charts, this chart is showing implied volatility in red – stating the expectation that TLT will move 2% per day for the next 30 days, while realized volatility for the last 4 weeks (in blue) has been just under 1% per day, which was already a fairly extreme move in bonds given their recent history.

This is pure panic in bond options.  This will either convert to pure panic in equities, or perhaps, as we see equities holding up well relative to prior lows, it’s a sign that the final trade to blow out a weak player has finally hit the market.  Once I see bonds start to show technical weakness, I will be much more confident that this panic is nearing its end.  Of course, bonds could skyrocket again on Monday and keep this panic response going, but with the way these charts look, I’m inclined to say we are closer to the end of this fall in equities than many might think.


Keith Harwood