Wall Street Secrets Revealed #3 – Why The Market Went Down 10%
The U.S. economy added 200,000 jobs in January and wages grew at the fastest pace in eight years. The tax law will continue to boost wages because corporations are giving their workers raises. States are raising their minimum wage. The unemployment rate is at 4.1%, which is forcing employers to offer higher pay to attract and keep workers.
So what does this have to do with the Market going down 10%?
Higher wages means more buying power, which means higher inflation, which means the Federal Reserve may raise its key interest rate faster and/or more frequently.
In the U.S. alone, the bond markets make up almost $40 trillion in value vs. less than $20 trillion for U.S. stock market. The bond market is larger than the stock market because corporation issue stocks, while governments and corporations issue fixed income securities.
Interest rates have an inverse correlation to bond yields. The yield on the 10-year U.S. bond shot up to 2.84% after the jobs report, reflecting higher expectations of more rate hikes. The increase in yields spooked the stock market. Prior to the January job announcement, The Big Boys were shorting market volatility using margin. Margin is basically getting a loan to buy securities. When you buy securities on margin, you must repay both the amount you borrowed and interest, even if you lose money on your investment.
Shorting volatility generates good risk returns until volatility spikes because these financial products decay, only if the Market continues to rise. However, the risk amplified after the CBOE Volatility Index, or VIX, more than doubled to the highest levels in six and a half years. When the VIX spiked, financial products such as XIV crashed.
VIX - CBOE Volatility Index
XIV - Velocity Shares Daily Inverse VIX Short Term ETN
According to MarketWatch.com, Credit Suisse said their popular exchange-traded note, XIV that was designed to bet against rising volatility will be liquidated on Feb. 21 after XIV lost more than 80% of its value in after-hours trading, triggering a technical liquidation, or "acceleration" event.
For us Retail Investors, it’s an opportunity to take the other side of the trade and buy the Milk. See my other post that talks about buying the Milk.
This post is my personal opinion. I’m not a financial advisor. Do your own research before making investment decisions. By reading this post, you acknowledge and accept full responsibility of any gains or losses.