TOM THORNTON: Hi, I'm Tom Thornton with Hedge Fund Telemetry. And today, I'm on Real Vision with Mark Ritchie, and we're going to talk about the markets, we're going to take some of your questions, and I think it's rather a great time to be talking about markets right now with all the carnage out here in the markets. We've had 10 five-alarm fires out here around the world, tons of different things that are happening not correlated with each other but certainly causing a lot of panic and destruction. So I'd like to welcome Mark Ritchie. Mark, welcome to Real Vision. How are you doing today?

MARK RITCHIE: Yeah, glad to be back. Thanks for having me.

TOM THORNTON: Great. Well, let's talk about the markets, and tell me what you think right now about the equity markets.

MARK RITCHIE: Well, it's been unprecedented, I think would be the best way to describe it. And I don't know where you want me to start, but there's a number of things that I think we've seen that certainly I've never seen before. But in studying some of these, we use the word unprecedented, it basically means you can't find any historical precedents for certain things or very few, and that's what we've seen.

So a couple of weeks ago, just to kind of kick things off, I had tweeted out-- we don't do a lot on Twitter, we've been doing a little more-- that the NASDAQ was getting a little bit stretched to the upside, meaning overbought. And I can't remember a time where we've gone from that overbought to this oversold this quickly off of all-time highs. I think there were, and this isn't just my work, but there's only been four weeks like the week we had two weeks ago in the last 110 plus years in the Dow. So I think the word unprecedented is right on, in terms of this is really rare.

TOM THORNTON: The rate of change is extraordinary. And usually, you don't get it you don't get a crash coming from the highs. You usually get it when it after it's been oversold for a period of time. So this is really incredible. And just remember, the coronavirus started in January, and the US didn't really notice it with the markets until late February. And then all of a sudden, all hell broke loose.

MARK RITCHIE: Yeah, that is certainly a good way of describing it. So one of the things we've looked at, and I think that's important, your point that crashes never happened off the high I think this is really important because that is kind of a point I've made routinely, that the aircraft has to lose lift first before just full-on panic and a nose dive ensues.

So I looked at how many times have we had a swift, really bigger than 15% correction? And this is where I always say, off of all-time highs. Because when the market is at all-time highs, the psychology is different. Generally speaking, people are not quick to just sell at any price, hit any bid, which is what we saw yesterday, of course, which we can get into because there were some really interesting things that we haven't seen that happened yesterday, at least in the US.

But the first thing I think people should know is that never have we had a correction this large off of the highs that was met with a V bottom back to new highs. And what I characterize as a V bottom is your snap back classic head fake sell-off. This is far, far too big, and there's been way too much damage done, both technically in terms of certain groups within the market and the amount of volume we've seen is incredible.

We had record volume on the NASDAQ composite prior to last week, actually back-to-back record week volumes on the NASDAQ, all time, per my work. That is a serious amount of shares changing hands. So anybody that thinks we're just going to head right back to the highs, I'm here to say, that is, based on history, not happening.

TOM THORNTON: Yeah, it's going to be difficult. And I look at wave patterns, and the thing that I've watched, when the first initial hit came last week and we bounced off of that Friday low, we had a huge bounce, about a 9% bounce off that. But from the work I do, we didn't qualify for the second wave bounce. It just was a day short of that.

So I think that right now, we're still in wave one on the downside, and it could take five waves. We did five waves back in Q4 of '18. And a lot of people have said, look, you've got a lot of stuff that's very oversold. Yes, I agree. But it's not as oversold having five waves like we did in December of '18.

And look, I think we also have a very, very precarious situation with this virus. Nobody really knows how long it's going to last, what's going to be the depths of the economic fallout. And people, they get panicky. They want to sell as stocks go lower. Sellers are motivated as stocks go lower. They're not motivated to buy as stocks go lower. There's nothing better than motivating sellers with lower prices. That's what happens.

MARK RITCHIE: Right. So yeah, just a couple of other quick points I would make in terms of the rarity of the situation because I also have, I guess, a few rays of hope, if you will, because I think for my work, we've made the beginning of a significant bottom. I can get into that in a little bit. But I don't think volatility is going anywhere, so that would be the other point.

Even if someone feels like they need to sell or they need to buy, my guess is you're going to get an opportunity to do either or both because when we see this type of a breakout, say in the VIX but not just in the VIX, in multi-asset class volatility, generally speaking, we don't mean revert back to the old levels.

It's sort of like you put in a new floor. I think you could even look at say, VIX in the high 20s is probably the new floor, at least for the next few weeks, I would argue months. This reminds me a little bit of when we had the flash crash in 2010. Short-term volatility spiked really high, but then we were in the 30s elevated range for months and months. I think we're going to have that certainly for the foreseeable future. It's going to be a headline-driven market for a while.

TOM THORNTON: Yeah, I grew up in California, and I wrote about this recently. I've been through a few earthquakes, and earthquakes take about 30 seconds and then it takes about six months of aftershocks and cleaning up the mess and rebuilding your house and everything like that. So I think you're right on with volatility staying rather high for a period of time. And I think just people are going to be worried about aftershocks. Oh god, did somebody pre-announce negative earnings? We really haven't seen the beat downs on negative pre-announcements yet either, and I think that's going to be really an important thing.

One thing also, we have a question from Charles, I just want to jump into some of those. He's talking about the massive algo-driven proportion of market volume. We've never seen that before, have we?

MARK RITCHIE: Well, in terms of the percentage of the actual trading that's algorithmic?

TOM THORNTON: Mm-hmm, with a downdraft like this.

MARK RITCHIE: Right. Certainly not and I know a lot of people have been following this type of stuff. But no, I mean, the short answer is well, of course not. And I know, some people have said 2018 was kind of maybe a hint, Q4 2018, of what happens when the all algos really start to sell.

But no, certainly they can overwhelm things, and yesterday we saw that. If you want to get into what we actually saw yesterday, it was the first time, at least in my career, where you had an overnight halt that didn't move, that immediately then led to an entire halt once the market opened. I actually thought we would trade even lower potentially yesterday. I was pleasantly surprised that we didn't hit more than two circuit breakers, depending how you look at it, and I could get in the reasons why I think that was.

But no, the algos are definitely driving these things quickly one way. And the two previous Fridays, we had what looked like algo-driven last 20 minute rally save attempts that seemed a little artificial to at least myself and some other people where you like, boy, true capitulation generally you see sort of throughout the day, not in 15 to 20 minutes of just wild buying at the end of the day, which has kind of led us to believe that the move we had to start this week, we were going to have another leg down was kind of where our work was suggesting, similar to what you were saying. The rally last week was not really convincing. And then with the news over the weekend, we just saw the floodgates kind of open.

TOM THORNTON: I spoke with the guy who is an energy hedge fund manager. He's been doing it 35 years. And he told me that throughout his entire career, he's never seen more news that is just so contrary to what people were expecting in the energy markets with this OPEC Plus meeting that just went off the rails and then the Saudi Arabia announcement on Saturday.

I was sitting at my desk here, and I saw this, and I was like, holy fuck, this is going to be just an absolute disaster. We already have the coronavirus, which we're sort of dealing with. We know it's transitory. But this was just, oh my god, they're going to full-on war against US shale, and Saudi Arabia and Russia are battling it out and they don't give a shit about making money. They're going to just torture everybody. So it was just like, oh my god.

But sentiment right now has gotten very, very negative. And [inaudible] oil sentiment is very low. S&P sentiment is very low. Look at the fear and greed, got to three yesterday.

MARK RITCHIE: Nothing's scarier than that.

TOM THORNTON: Yeah, it's great indicator because it doesn't tell you what traders are saying because traders will say, oh I'm bullish or I'm bearish. It doesn't really say that, but it tells people what they're doing. And I think it's important for everybody just follow that every day and see how that's going.

And the other thing on sentiment is it can stay low or stay high for a period of time. You need a trigger deterrent. So I think if you're going to be in a period, like you said, volatility high, sentiment can be low for a while, and I think that's the market that we're in right now.

MARK RITCHIE: Yeah, well, so we've covered a lot of the negative so far, and I am not convinced we're in a secular bear market yet. Clearly, this is a stealth bear market or cyclical bear market, which is kind of what we were expecting, based on what we've seen. But I'm happy to and I'd like to lay out the case based on what we saw yesterday that I think we've seen the lows for at least a few weeks, if not longer. And sentiment is one part of it. You're right, fear and greed, that's not one I track as much. I look at it every now and again. I don't remember ever seeing a three.

TOM THORNTON: We were pretty low in December of '18. And again, it took a lot. It was just constant, you know, beatings will continue until morale improves. I mean, it took a long time. Now we're only a few weeks into a real sharp downturn.

MARK RITCHIE: So yeah, let me just give a couple of interesting precedents that I think people at least should be aware of. This move in rates is like nothing I've ever seen. So the move specific that we had, you know, I traded 30-year bonds, I watched 30-year bonds. We had a six big handle move on Friday. The range was wider, and so I looked it up after the close of Friday.

We've only had three other one-day moves like that in history. One was at the lows in '82. The other was October '87. The other was March '09. Then we followed that up with a 10 plus handle move yesterday. I mean, I'm not saying it's not bad. It's bad. But the bonds are telling you, you know, you would think literally the world is ending. So that's kind of one thing I've watched.

Then yesterday, as I said, I thought the market was going to be under incredible pressure. And sure enough, we hit limit down. We came in, and I even tweeted yesterday morning because the S&Ps are sitting in a lock limit down. And as soon as the SPDRs were trading, they were down 7.5%. I said, well, they're just going to immediately go to the next circuit breaker.

And this has been a concern I've had for a long time, and this is something I think people should be aware of, even if things get a lot worse, what is going to happen if or when everybody just starts hitting sell buttons while some things have hit circuit breakers because, in case people didn't know, they put in individual stock circuit breakers after the flash crash because that'll solve everything, if you just put in arbitrary limits. Well, when certain ETFs hit a limit or components of ETFs hit a limit when others don't, and what we saw yesterday was an immediate just sort of halt across the board once everything opened.

TOM THORNTON: We knew that was coming.

MARK RITCHIE: Yeah, and a lot of people were thinking, maybe it's going to get a lot worse. Are we going to un-halt and then just take it to the next breaker? Because if you've ever been in any of these stocks, sometimes they'll just literally cascade it from breaker to breaker. And then when it finally starts trading, that's usually the low because the smart hands were the only ones who really get anything out.

Well, what we saw though after we came off was a huge rush that puts. If you looked at intraday put call yesterday, it spiked higher than I'd ever seen in my whole career. Two and a half times the put buying with the VIX at 60 and the S&P at 2,720 and everybody ran for puts. And then we had the highest put call reading we've had, a little bit higher than we had in December of '18, on both total put call volume and equity-only put call.

Well, let me ask you, do you think those insurance contracts are going to pay in the short run? When everybody goes to buy insurance, generally speaking, at those levels and at those insane premiums, I would just argue I think we have a short-term pretty convincing low because think in terms of psychology, you're not forced to sell something if you just ran and bought insanely high insurance on it, and that's what everybody did yesterday.