Volatility: The Deadly Enemy of Leverage ~ The Risk Averse Alert

Tuesday, November 08, 2011

Volatility: The Deadly Enemy of Leverage

Looks like anticipated technical deterioration set to pave the way for the next round of selling whose consequence is likely to result in major indexes challenging lows established early-October, if not take these lows out, is well along in forming...

Today's "disconnect" between euro-zone credit market conditions and those in the stock market in truth probably should be thought more a case of a delayed feedback loop whose operation functions at the behest of a consensus belief that, players on the world stage (both in the public- and private-sectors) are exercising sound reason via positions taken within respective domains. However, there is no shortage of circumstance thoroughly discrediting any assumption sound reason actually is forming a solid foundation likely to abate risk of systemic calamity. Combine a leveraged speculating community whose present exposure leaves the group more vulnerable now than in '08 and a fascist body politic, and stability rather should be seen the last thing being cultivated here.

This might seem counter-intuitive, but volatility's increase only is likely to astronomically elevate extraordinary challenges the leveraged speculating community is sure to face in the period ahead. Leverage works great when markets run on a one-way street (remember the "Greenspan put?"), but in an unstable environment breeding chaos, leverage all too likely will prove deadly. It is with this in mind today we find scarcely a soul pondering prospect of leverages' chaotic unwind: day after day, limit down, circuit breakers triggering — all in a mad scramble to raise capital — and today's sanguine consensus hopelessly trapped. That's where we're heading. So-called "masters of the universe" revealed mere mortals, making today's Jon Corzine a representative poster child.

For now, though, notwithstanding the market's relative technical deterioration as revealed above via the NYSE McClellan Oscillator, still-positive technical dispositions across the board in absolute terms suggests the period straight ahead might find the market holding up, relatively speaking. In the framework of yesterday's prospective view forward an impending decline challenging October lows could be preceded by a sideways trending market whose development over days ahead finds technical conditions presently substantiating the probability.

Fast Money
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