By: Kent Engelke | Capitol Securities

Yesterday, I wrote it is the seemingly insignificant event that causes a calamity, utilizing the devaluation of the Thai Baht and the failure of the Bear Stearns mortgage hedge fund as examples. Both events on the surface were largely insignificant, but in reality were the catalyst or a harbinger of things to come.

Last week, two leveraged short volatility funds were worth about $2.5 billion. Today, they are worth about $135 million. This is nothing in a $23 trillion market capitalization of the S & P 500. The termination of these funds however was the catalyst that caused global losses of $3 trillion.

According to Barclays, there is an estimated $1.5 trillion is/was invested in funds with volatility linked strategies, a colossal sum capable of shifting global markets. Again, according to Barclays, as of Tuesday, direct volatility target funds have current assets under management of around $350 billion, of which $225 billion need to be sold in coming days.

Wow! If this data is correct, when or if these positions unwind, they can impact the markets, especially if they are unwound rapidly.

Many times I have commented about the leverage in the financial system, leverage that utilizes historical correlations. It is backward looking data and may not apply to the mechanics of today’s markets where the averages can swing 5% in a matter of minutes because of technology. The proverbial velocity of change is frightening and it can greatly skew valuations.

Yesterday was another volatile day. The Dow at one juncture was up 380 points only to close unchanged. The NASDAQ was down about 1% because of the selloff in some of the must own technology shares. The S & P 500 was down about 0.5%.

The 10-year Treasury auction was the weakest since 2015, drawing the highest yield in four years. Depending upon the maturity, prices were down between ½ and 1 ¼ points.

Chicago Fed President signaled yesterday the Federal Reserve would accelerate its tightening schedule if inflationary pressures increase, a statement that I think is obvious, but was a catalyst for the reversal in the Dow and for weak Treasury prices.

Last night the foreign markets were mixed. London was down 1.01%, Paris was down 0.87% and Frankfurt was down 1.17%. China was up 1.18%, Japan was up 1.13% and Hang Sang was up 0.42%.

At this juncture, the Dow should open flat but his could change radically given the massive influence of technology based trading that can skew the averages 500 points in a matter of minutes, a skewing whose basis is entirely upon momentum. In my view, this is not investing, but rather a blatant casino type attitude that has been permitted to be created by the advent of technology based trading models, models that are similar in nature and utilizing outdated rules that have permitted massive market imbalances.

The 10-year is off 8/32 to yield 2.86%. The 30-year is off 18/32 to yield 3.15% ahead of the auction. Will these rising yields again impact equities?