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this is the most-geared component of markets meteorology. longer periods of sustained low vol + low covar makes system leverage rocket up and mechanically depresses IVs and flattens turns volatility smiles into frowns ( #sorrynotsorry) as vol sellers rake in $ and buyers bleed it https://twitter.com/choffstein/status/1336882039329472512
One of my fav things to share here is this, because it conveys a lot of the signal with a small amount of brain damage. The easiest most credible bull case to make is a mix of: "rates volatility rises," "equity volatility compresses," and "neg price correl of stock & bond prices"
and once that is understood, it is easy to expand upon. simply: the more diversification benefit a portfolio of liquid exchange-traded products realizes, the more it will be leveraged by strategies that use the portfolio vol as an input into local risk-weights
likewise, if you are bullish small or mid cap stocks or out-of-favor sectors, you shouldn't be rooting for high-flyers to get knee-capped, that would bring the entire market down. you're rooting for them to work well-enough that high concentrations force non-indexers to rebalance
Let's look at market composition through a simplified lens for a second: a small portion of stocks make up a huge % of s&p 500 market cap and s&p 1000 is very small vs s&p 500. the market cap comparisons will make sense in a second, the fundamentals are irrelevant to this example
First, to state the obvious, when a sector becomes such a high % of market cap, there is no "exit." best case you own it and they grow into the valuation, exit via "greater fool" is basically impossible. let's talk about why: for one, there simply isn't enough "others" to do it
but, more importantly, what else is big enough in float for you to rotate into without creating unpalatable market-impact? You may be able to sell $15B of large cap growth quietly with little impact but LOL good luck at trying to redeploy that into smid cap index or large value.
if you were the kind of person that thinks about markets as a big n-way hydraulic gross where the ends are bladders of different sizes... what happens when you squeeze one? the others inflate. what happens if you squeeze the big one a little? the little ones expand a lot. get it?
