The Bull's Anxiety Pills
How much do we believe numbers? Once upon a time in a pre-LTCM universe, volatility calculations, put-call parity and hedge ratios were magical fix-its and we could always count on the numerical valuations to bail us out of a jam.
But now that the Black Swans have eaten too many mice and the proverbial poop storm is at a downpour, how much can we trust our trusted calculations and correlations?
Fritz Meyer makes a valid point about emotions playing a large role in troubled times. The S&P and the 10 year Treasury have posted a 0.8412 correlation in the 60 trading days leading up to June 16th, showing stock prices and bonds most closely linked since Bloomberg can remember. The last time the correlation was close to this strong was at the start of the 2002 bull market run. In the past, information such as this would have motivated many to buy and the bullish predictions would have been numerous, not so much today.
Getting this close to the magic correlation number of "1" would have made my old Options Prof soil his seersucker and end class early in order to telegraph his broker. But if better days really are ahead, can I get something more tangible than "01"?
How do we account for panic in the contemporary valuation scenario?
I don't think the good days are back for investors. Maybe for traders, as they love the volatility in the bear markets. I think we are about to head back into a bear market. Technical indicators (death cross, 200 DMA trend, etc) are all pointing towards a bear market. The bulls on the sell-side and in the press want the good days back. I just don't see it happening.
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