Credit Suisse: How the Price of Credit-Default Swaps Provided a Warning

"... exceeded every high-water mark ... of the past 15 years"

By Elliott Wave International

Credit-default swaps were invented in the mid-1990s but a lot of people did not become aware of them until around 2000, and that awareness increased dramatically during the 2008 financial crisis. As you may recall, so-called CDSs were all over the news then.

Today, these financial derivatives are in the news again.

In a nutshell, credit-default swaps are insurance against a debt default: The higher the perceived risk of default, the higher the premiums.

With that in mind, back in November, the Global Market Perspective, a monthly Elliott Wave International publication which covers 50-plus financial markets, showed this chart and said:

Just last month, Credit Suisse -- the once-venerable Zurich-based global investment bank that [the Global Market Perspective] has warned about for years -- saw prices for its credit-default swaps (CDS) shoot past 300, indicating investors' increasing belief that the bank will default. As shown, CDS prices have exceeded every high-water mark set during every crisis of the past 15 years.

Since then, the price of those CDSs have approximately tripled, climbing north of 1000.

As a March 18 news item from The Financial Times noted:

Cost of insuring Credit Suisse debt dwarfs that of other banks
The price of Swiss lender's credit default swaps climbs to record high this week

During the same weekend that news item published, Credit Suisse collapsed, and the Swiss government brokered a deal which involved rival UBS buying Credit Suisse for $3.2 billion.

Worries about the global banking sector are not confined to Credit Suisse.

Here's a March 24 headline (CNBC):

Deutsche Bank shares slide after sudden spike in the cost of insuring against its default

Yet, at least one strategist expressed this (Yahoo! Finance, March 24):

Everything 'really is fine with Deutsche Bank' due to capital levels, [chief strategist] says

Other professional observers of the banking sector have also basically said "don't worry, big banks are in good financial health." But keep in mind that many of these same observers were caught off guard by what's already occurred with failed banks.

Elliott Wave International has been warning of this persistent optimism. The time will likely soon arrive when even those who are now expressing the most optimism will shift to pessimism.

That will be the juncture of what Elliott Wave International calls the "point of recognition."

You want to be prepared before then.

Now is the time to read Elliott Wave International's special report "How Safe Is My Bank?," which is valued at $49, yet, you can get it for free by following this link.

This article was syndicated by Elliott Wave International and was originally published under the headline Credit Suisse: How the Price of Credit-Default Swaps Provided a Warning. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

Explosive Rise in Stock Market Volatility! Why It May Be Ahead

There are now S&P options that expire each day of the week. What that may mean.

By Elliott Wave International

Here's a Wall Street Journal headline from a couple of months ago that some people may have scanned without much contemplation (Jan. 11):

VIX, Wall Street's Fear Gauge, Extends Longest Lull Since 2021

While some investors may not consider a subdued VIX highly significant, Elliott Wave International does. As we've repeatedly stated: prolonged periods of low volatility in the stock market are inevitably followed by jumps in volatility -- and often, those jumps can be quite high.

With the "lull" in the VIX so extended, the next surge higher in volatility may be exceptionally high and last for an exceptionally long period of time.

Yet, there's at least one more strong reason to expect a super surge in the fear gauge.

This chart and commentary are from the March Elliott Wave Financial Forecast, a publication which provides analysis of major U.S. financial markets:

The CBOE Volatility Index (VIX) is purportedly a measure of expected future volatility in 30-day S&P 500 index options, but in fact it's a real-time reading of complacency vs. fear. The index has been subdued, declining to 17.06 on February 2 in conjunction with [an Elliott wave] rally. This was the lowest VIX since January 5, 2022, the very day of the Dow's all-time high. So, investors are as complacent now with respect to a stock market decline as they were when the blue chip indexes hit top tick in the great bull market.

Digging deeper, we find a segment of investors who are using the market to make casino-style bets. According to Bloomberg, more than 40% of the S&P 500's total options volume occurs in what is known as "zero-day-to-expiry" options, or 0DTE, as shown by this graph. These are options that expire within 24 hours, making them highly sensitive to changes in price because of the lack of time premium. In 2022, the CBOE and CME expanded existing options so that there are now S&P options that expire each day of the week, allowing investors to speculate using these ultra-short-term instruments. Options dealers have to hedge against the risks of outsized moves in 0DTE options, which increases the potential for an explosive rise in volatility.

If another major leg down occurs in the stock market, wrong-way bets in highly leveraged 0DTE options will spike volatility.

The question is: What are the chances that the price downtrend which began in January 2022 will intensify?

While Elliott wave analysis offers no guarantees (no market analytical does), the stock market's current Elliott wave structure is highly revealing.

If you'd like to learn how you can analyze financial markets using the Wave Principle, read Frost & Prechter's Wall Street classic, Elliott Wave Principle: Key to Market Behavior. Here's a quote from the book:

In markets, progress ultimately takes the form of five waves of a specific structure. Three of these waves, which are labeled 1, 3 and 5, actually effect the directional movement. They are separated by two countertrend interruptions, which are labeled 2 and 4. The two interruptions are apparently a requisite for overall directional movement to occur.

[R.N.] Elliott noted three consistent aspects of the five-wave form. They are: Wave 2 never moves beyond the start of wave 1; wave 3 is never the shortest wave; wave 4 never enters the price territory of wave 1.

... Elliott did not specifically say that there is only one overriding form, the "five-wave" pattern, but that is undeniably the case. At any time, the market may be identified as being somewhere in the basic five-wave pattern at the largest degree of trend. Because the five-wave pattern is the overriding form of market progress, all other patterns are subsumed by it.

If you'd like to delve deeper into the Wave Principle, here's good news: You may read the entire online version of the book free once you become a member of Club EWI, the world's largest Elliott wave educational community (approximately 500,000 worldwide members).

A Club EWI membership is also free and opens the door to complimentary access to Elliott wave resources on financial markets, investing and trading. Some of these resources (videos and articles) are from Elliott Wave International's own analysts.

Join Club EWI (free membership) by following this link: Elliott Wave Principle: Key to Market Behavior.

This article was syndicated by Elliott Wave International and was originally published under the headline Explosive Rise in Stock Market Volatility! Why It May Be Ahead. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.