Volatility Is the Only Constant

Stocks ended on a strong note, led by big-caps such as AT&T (T Quote), Exxon Mobil (XOM Quote) and Merck (MRK Quote). Perhaps traders were drawn to those most-liquid names as they search for a balance between the draining of liquidity amid a global repricing of risk, and a relatively resilient U.S. economy.

"There is uncertainty because of all the volatility, which makes people think some kind of financial event is more likely, and then there's the question of how much of it has to do with hedge funds," says Bill Nichols, a trader at Bear Stearns. "There are thousands of hedge funds ... it's the search for equilibrium."

In the credit markets, a modest rebound smoothed over a volatile session. The high-yield bond market rebounded in the last hour of trading along with the stock market, sending risk premiums lower by about 50 basis points, but there were signs of trouble midday, just after the giant volatility spike by the CBOE Volatility Index.

One high-yield bond fund manager reported that between the hours of 10 a.m. and 2 p.m., none of the brokerage firms were pushing out quotes for the high-yield derivative index, the CDX HY8. Typically he gets at least three per minute.

To this manager, the radio silence meant that Wall Street was under excessive risk-management control, perhaps as some rumor or fund sorted itself out. When quotes started to refill his inbox, there was no obvious price dislocation. It just started back up, he says, noting that quotes resumed after news came out about Caxton.