S&P 500, Correction 2014 & Asia


S&P 500 as hedge...will the S&P 500 follow Europe if it continues soft or will it follow China should it continue higher.

The S&P 500 chart below has extreme danger written all over it, and yet the VIX fear index trades at close to a record low. That means it is still very cheap to buy downside insurance against a crash in the stock market from these elevated levels.

Shorting the S&P 500 ETF as a hedge against a stock market crash.

Europe, Sanction Spiral & Recession


“The recession designation matters because calls for policy interventions are stronger in recessions, making large interventions politically more palatable”. “It is too early to call the end of the recession in the euro zone.”

http://www.nber.org/cycles/cyclesmain.html
http://www.cepr.org/content/euro-area-business-cycle-dating-committee
http://www.cityam.com/1405988003/sanction-spiral-russia-and-europe-may-fall-recession

L. Bacall





Europe, Loss Aversion & German Bund Future


http://www.bloomberg.com/markets/rates-bonds/government-bonds/germany/
http://www.eurexchange.com/action/exchange-en/4792-15644/15646/quotesSingleViewFuture.do?maturityDate=&changeDate=change+date
http://www.marketswiki.com/mwiki/Eurex_Euro-Bobl
L Eingetragener Firmenname Bundesministerium für Wirtschaft und
Technologie
L D-U-N-S® Nummer 333785538
L Geschäftssitz Scharnhorststr. 34-37
L Postleitzahl 10115
L Postalische Stadt Berlin
Land Germany
W Länder-Code 276
Postfachnummer
Postfach Stadt
L Telefon Nummer 030186150
W Fax Nummer 030186157010
W Tätigkeit (SIC) 9199
Quelle: http://www.upik.de
SIC-Code: 9199 GENERAL GOVERNMENT

http://www.deutsche-finanzagentur.de/startseite/ 
http://www.ishares.com/de/individual/de/produkte/251464/ishares-dax-ucits-etf-de-fund?siteEntryPassthrough=true 

VIX, Volatility & Loss Aversion


Laboratory and field evidence suggests that people often avoid risks with losses even when they might earn a substantially larger gain, a behavioral preference termed “loss aversion.”

Loss Aversion = Cognitive Emotional Schema

Humans:
situation  = volatility (higher vix)

 
cognition = cognitive map
“I like to win, but more than anything, I can’t stand this idea of losing.
Because to me, losing means death.”

 
emotion   = fear

 
behavior/operation = buy/sell decision (fear reduction)

Loss Aversion (cognitive emotional schema) & Zeigarnik Effect
situation = vix/volatility/blackswan... = fearful stimuli
cognitive response to fearful stimuli = schema activation
emotional response = fear
behavioral response = buy/sell decision (fear reduction)

Zeigarnik effect - the tendency for people to remember uncompleted or interrupted tasks better than completed ones.
(bad is stronger than good)

http://www.carlsonschool.umn.edu/Assets/71516.pdf
http://www.psych.nyu.edu/phelpslab/abstracts/NatureNeuro2001.pdf
http://archpsyc.jamanetwork.com/article.aspx?articleid=490539
http://dirkbergemann.commons.yale.edu/files/kahnemann-1984-choices-values-frames.pdf
https://www.bus.umich.edu/neuroacrp/Yoon/Bechara.pdf
http://qje.oxfordjournals.org/content/112/2/647.short
http://www.nber.org/papers/w8143.pdf
http://www.pnas.org/content/106/13/5035.short
http://math.unice.fr/CIF/index_fichiers/talks/Bechara.Nice.12.08.10.revised.pdf
http://scan.oxfordjournals.org/content/early/2012/02/15/scan.nss002.full
http://www2.econ.iastate.edu/classes/econ642/Babcock/haigh%20and%20list.pdf
http://ideas.repec.org/p/fip/fedfwp/2010-24.html
http://www.frbsf.org/economic-research/publications/economic-letter/2013/april/risk-aversion-stock-price-volatility/
http://cib.natixis.com/flushdoc.aspx?id=57605
https://www.banque-france.fr/fileadmin/user_upload/banque_de_france/publications/Revue_de_la_stabilite_financiere/etud3_1206.pdf
http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1565.pdf
http://www.nytimes.com/2012/03/24/your-money/why-people-remember-negative-events-more-than-positive-ones.html?pagewanted=all

Instincts of the Herd in Peace and War*. W. Trotter.
Macmillan: 1908; reissued by T. Fisher Unwin: 1919.
Groupthink*. Irving L Janis. Houghton Mifflin: 1982.




























Fed, Panic & Psychology


The Sell Off & VIX

Panic is a fear or an acute case of anxiety which dominates or replaces thinking and often affects groups of people. Panics typically occur in disaster or violent situations which may endanger the overall existence of the affected group.

The word panic derives from the Greek πανικός, "pertaining to Pan”, because the ancient Greeks credited the battle of Marathons victory to their goat-god, Pan. They used his name for the frenzied, frantic fear exhibited by the fleeing enemy soldiers. Humans are also vulnerable to panic and it is often considered infectious, in the sense one person's panic may easily spread to other people nearby and soon the entire group acts irrationally.

In financial markets panic selling is a wide-scale selling, in order to get out of an investment. A rapid increase in sales order for a particular investment, which pushes down its price. This can cause a spiraling effect or "vicious cycle" in which investors see a rapidly decreasing price as a sign to get out of a investment, which further depresses the price and prompts more investors to sell. This type of selling is often related by a fear of loss.

The main problem with panic selling is that investors are selling in reaction to pure emotion and fear. Almost every market crash is a result of panic selling.
Furthermore "Loss aversion" (being more averse to losses than gains), as it is known in the world of behavioral finance, is validated within the VIX world. The VIX concept was first introduced in a research paper by Professor Robert E. Whaley at Duke University. With the introduction of the new VIX index in 2003, volatility has become an asset class, tradable through the use of futures. VIX futures and options are both negatively correlated with equities market performance.

The development of this new asset class is one of the more important developments in the options market since the introduction of the Black-Scholes pricing model in 1973.
The VIX is quoted in terms of percentage points and translates, roughly, to the expected movement in the S&P 500 index over the next 30-day period, on an annualized basis.
Investors believe that a high value of VIX translates into a greater degree of market uncertainty, while a low value of VIX is consistent with greater stability. Although the VIX is often called the "fear index", a high VIX is not necessarily bearish for stocks. Instead, the VIX is a measure of fear of volatility in either direction, including to the upside.

A high value means that higher volatility is expected. Also, extremely high readings usually indicate stock market bottoms and extremely low readings usually indicate stock market tops.

http://www.bloomberg.com/quote/VIX:IND


















Extract
Ludewig S, et al. Decision-making strategies by panic disorder subjects are more sensitive to errors. J Affect Disord. 2003 Sep;76(1-3):183-9.
Ludewig S, et al. No lasting effects of moderate doses of MDMA (Ecstasy) on memory performance and mood states. Biol Psych, 2003:205 San Francisco
Ludewig S, et al. Information processing deficits and cognitive dysfunctions in panic disorder. Can J Psych Neuroscience, 2005