Volatility anywhere leads to volatility everywhere

The market is suddenly breaking down. It's not coming on any headlines but stocks reversed their gains and are now negative. The VIX has show 13% higher and USD/JPY is down on the day at 111.09 after hitting a high of 111.71.

I call it the volatility whip but it might be better to envision a garden hose. Picture shaking one end and watching the wave move through the rope.

When there is volatility anywhere in markets it works its way through the rope. During the crisis it was instantaneous but in 2017 it can take a few days.

So this week there was volatility in the bond market and some currencies and now it's hitting stocks.

Mechanically, here's how it works. High levels of leverage including so many direct or indirect bets against volatility are setting off a chain reaction. To simplify, you might have one fund that sells stocks whenever bond market volatility rises. By extension, that selling creates some negative pressure in stocks and the cascade begins.

At times, the volatility circles back, like it is now in USD/JPY. Over time the energy from the shake of the rope dissipates and risk trades later recover.

As a rule of thumb, it's almost always the bond market on the leading edge and right now, despite the risk aversion in stocks, Treasury yields are still higher on the day. To me that says this is yet-another dip to buy.

In the future, if volatility in the dollar, bonds, commodities or anywhere else picks up; watch out for trouble in stocks ahead.