The equity skew finally caught up

Last week I was banging the drum about equity skew being way too cheap.

This week it caught up to itself in a single day.

Bond skew had been sitting high for weeks. Gold skew was even higher, deep into the puts. Equity skew was at the bottom of its range, like none of the same risks applied to stocks.

That kind of divergence doesn't tend to hold for very long.

This week, equity skew went from the bottom of its range to the 70th to 80th percentile. Pretty much a single day's work.

That's the catch-up trade I was expecting.

Now, let's be clear, there was a reason why equity skew had flattened so much. We had seen one of the fastest rallies in stocks ever from the March lows.

The trade was not to sell calls and hope for the best. It was the puts that had become too complacent and people dumped protection in search for more upside. Owning some equity downside given where the other asset classes were pointing just made sense.

Cross-asset reads give you these setups regularly if you know what to watch. Bonds and gold tend to price macro risk earlier than equities. They don't always get the timing right, and they don't always get the magnitude right. But when their put skews go crazy bid and equity skew sits at the bottom, you've got a tradeable divergence sitting in plain sight.

The trade comes from reading what each asset class is already telling you. The data does the macro work for you.

For me, that's the bigger lesson. Long the cheap skew worked out this time.

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