The volatility of the past 10 days was incredible and perhaps a sign of things to come.
That's the conclusion of a note out Wednesday from Deutsche Bank strategists Oleg Melentyev and Daniel Sorid.
The note recaps the landmark moves of last week: a so-called seven-sigma move in equities, an all-time record change in the volatility of volatility, a 700-point change in the S&P 5oo over the week, and four consecutive days of six-sigma moves in oil.
All in all, according to the note, "recent trading sessions were nothing short of extraordinary."
The strategists took a look at similar historical periods to try and get a read on how markets typically react in the aftermath of such historic events. The Vix, which uses option prices to gauge expectations of volatility, closed above 30 three days in a row early last week, and did the same Tuesday. It is currently trading at around 26.
History seems to suggest that once volatility jumps to 30, it will stay there for several weeks, and in some cases months. That has been the case on seven different periods in the past, according to the note.
It said:
The only exceptions that happened during the past 20 years have taken place in early 2000 and late 2007/early 2008. So technically speaking, even periods of quick reversal from a 30pt VIX levels have previously proven to be prescient indicators of more volatility to come down the road. We would thus caution our readers not to be too quick in dismissing what happened over the past two weeks as simple "overreaction".
The note also picked up on the difficulty some exchange-traded funds had pricing August 24, a topic Business Insider has written about here and here. It has led to some concerns over the way in which the New York Stock Exchange opens in times of volatility, with many stocks not opening for several minutes after the market opens.
Deutsche Bank said in the note:
One particular development that gained some attention but still lacks proper appreciation by the market, in our view, is a failure to price dozens of equity ETFs on last Monday opening, a development that could have long-lasting repercussions for this $2trln AUM industry. As it often happens, this surprise development exposed how far off the reality perceptions stood on the topic of liquidity. Whereas so many pundits predicted the day when HY/IG ETFs will fail to clear, plain-vanilla equity ETFs failed to do so, while no issues were reported in credit space.
Expect both volatility and a focus on the pricing on exchange-traded funds during periods of market instability to continue.
