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VIX Futures Move with S&P 500

In an ongoing decoupling between the VIX and stock prices, we watched VIX futures decline today even though the S&P 500 was down over 1%.  Many would attribute this to the “holiday effect” created by the Christmas season:


I would love to think that the divergence is predictive of a relief rally in which the markets stop expecting the worst, but as treasury yields continue to fall, I hold little hope.  A 10 year treasury yield of 1.8% would align with a lower equity market.  It also seems that the bank stocks are under severe pressure with Bank of America trading below $5 a share.

In rather good timing, some researchers at the New England Complex Systems Institute just released a research paper titled, “Evidence of market manipulation in the financial crisis”.  As I have complained in the past, the researchers attribute much market volatility to the repeal of the uptick rule and subsequent “bear raids”.  Read the full paper here:[Download not found]

The basic synopsis of their study is based upon certain short-selling of Citigroup:

On November 1, 2007, Citigroup experienced an unusual increase in trading volume

and decrease in price. Our analysis of fi nancial industry data shows that this decline coincided

with an anomalous increase in borrowed shares, the selling of which would be a large fraction of the

total trading volume. The selling of borrowed shares cannot be explained by news events as there

is no corresponding increase in selling by share owners. A similar number of shares were returned

on a single day six days later. The magnitude and coincidence of borrowing and returning of shares

is evidence of a concerted eff ort to drive down Citigroup’s stock price and achieve a pro fit, i.e., a

bear raid. Interpretations and analyses of financial markets should consider the possibility that the

intentional actions of individual actors or coordinated groups can impact market behavior. Markets

are not sufficiently transparent to reveal or prevent even major market manipulation events. Our

results point to the need for regulations that prevent intentional actions that cause markets to

deviate from equilibrium value and contribute to market crashes.

Should we wonder if Bank of America is experiencing similar bear raids?


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