Sunday, April 12, 2009

The upcoming Black Swan of Black Swans?

"Anyone who is doing anything sensible right now is either losing money or is out of the market entirely", and that "liquidity deleveraging is approaching (if not already is at) critical levels", and finally the scariest part: "we have crossed into major statistically deviant territory, likely approaching a level that is 6 standard deviation away from the recent norms."

He pointed out that NYSE weekly volume is running about 9% below 52 wk average. But this may not necessarily be the result of deliberate hedge fund deleveraging or increasing risk-aversion by quant traders. From my personal experience, the usual opportunities for mean-reversion have just markedly decreased in the last few months, with much of the cash sitting on the sideline. I believe that quant traders are still ready jump in at any time to provide liquidity should the market demands it. I don't think that the recent market condition portends a 6-sigma event, but if one should occur, it may actually be a great profit opportunity for many short-term mean-reversion traders just as in those past 6-sigma events.


Anonymous said...

The fact that you're predicting it means that it isn't a Black Swan, by definition.

Ernie Chan said...

That's a good point!

John said...

NYSE has also been losing market share to Nasdaq, BATS and the rest for quite a while now, so a decline in NYSE volume alone is not indicative of anything.

Greybeard said...

The aggregate market caps of S&P 500 components are down more than 25% below the 52 week average. It now takes more than 25% more volume just to trade the same value as 52 weeks ago. The 9% down volume figure is worse than it first appears considering the drop in share prices.

The wild card is how much of last year's NYSE volume is now trading in dark pools? Is it statistically significant?