We Interrupt Normal Programming for....Vol!



Alright, so at some point in the next few weeks, we’re going to be able to start analyzing markets again without simply writing off the most recent price action to bubble-mania, bitcoin flows, stock-and-trade momentum, or any other fanciful unintelligible metric of your choice.

Let's go to the facts:
  • The Treasury curve is bull steepening, indicating there isn’t much of a change in long-term sentiment, but a modest re-pricing of short-medium term expectations for the hiking cycle.
  • More to the point, there hasn’t been a big bounce back, FTQ flow, or simply a material reversal in UST term yields. Look, there’s another 30bps to go in UST 10yr before we get to where we started the year. And I repeat, the long bond at 3% and a 30yr fixed mortgage at 4.25% won't bring the economy to a screeching halt.


  • Sticking with rates...credit markets aren’t showing any stress either--HY is down less than 1% for the day, and IG credit indices are something like 4bps wider on the day. Color me unimpressed with this state of panic--not two years ago that type of vol was just another day at the office.
  • And looking at another of our favourite markets,  the USD is far from reversing...in fact we’ve just now given up a week’s worth of gains in DXY.  Not much to speak of here, until we start looking at the 1.20 level in EUR, or taking out 112 in JPY.


  • Similarly, if I were to do something reckless like use usd/mxn as a proxy for global EM currency risk appetite, it is clear there is a long way to go to reverse out recent gains:


  • Meanwhile, more prosaic markets--yet those linked to global demand and the manufacturing cycle, have been stable, nearly boring. Take a look at the copper chart, which has lulled traders to sleep, despite “accelerating global growth” being the talk of the town:


At this point, it appears we’ve burned off the 5-6% outperformance in the US equity market...a market that nearly the whole world said was some combination of illusionary, a “melt-up”, driven by January retail flows, or simply nuts...all with relatively little collateral damage.


So what’s going on? Can this degree of vol really be isolated to such a deep, liquid market? Let’s take a look at the chart that ties it all together….frequent commenters know what’s coming next:




That’s the VIX, going out today above the magic 30 level, higher than only one other data point in the past five years, which was right after the Chinese destructo-deval of August 2016. Put another way, this measure would indicate we're at levels to suggest widespread panic, blood in the streets, and margin departments gang-pressing Park Avenue passers-by into temporary service.


Now stop and think about just how complacent this market has become, just how much money has flowed into short vol, or gasp, levered short vol, how pension funds now think short vol is a high-yielding asset class, and how there is just a ton of traders that have gotten fat and happy collecting short gamma nickels.


The gamma check has come due...never send for whom the bell tolls; it tolls for thee.


With the S&P looking set to close at late December support levels, the overarching message is there isn’t a genuine change in macro sentiment, but rather a reversal in a market that had simply gone too far, too fast dependent on an avalanche of money, momentum and hope.


I don’t want to use the term “healthy correction”, especially in a market that was high on financial amphetamines rather than "healthy" to begin with.  Yet there is little evidence to suggest this selloff is global in nature but is instead blowing off the exuberance of the past couple of months. Will it continue? I’m skeptical the party is over--I see no reason to change my optimistic view of foreign assets....but the sordid short volatility tale may just be getting going.

Shawn
TeamMacroMan2@gmail.com
@EMInflationista
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johno
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February 5, 2018 at 10:05 PM ×

I've sold VIX futures and VXX after-the-close .. on a hunch. Presume a massive position-squaring. Anyone more intelligent about my position than me? Shouldn't be hard ..

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johno
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February 5, 2018 at 11:44 PM ×

VXX down >$10 now from post-close highs. Closed that out, but still holding a short position in VIX futures.

I suppose there are two schools of thought. The "this sets off a self-feeding cascade of de-risking culminating in a crash" versus the "normal de-risking set against a supportive macro picture." I subscribe to the latter (hence holding VIX futures short acquired post-close) and take some comfort from the fact that bonds finally acted like they're supposed to. Couldn't say that of Friday's action. Of course, I can't offer you some mathematical proof that the first narrative is incorrect.



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johno
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February 6, 2018 at 12:03 AM ×

Holy f-ck. It was an XIV "termination event"? Well, thanks for playing guys. Where XIV is trading currently, these guys just gave back all their premium collected over >5 years! In a day when nothing of macroeconomic consequence happened and with global PMI at post-GFC highs. Impressive work, Brad, Thad, and Chad!

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Unknown
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February 6, 2018 at 1:41 AM ×

If you are selling vix here I think you need our head examined.

Don’t get me wrong, selling vol is going to pay big this year but these levels aren’t actually that high. Stop thinking with a 2017 mentality and remember that vol can stay way high for way long and you just wiped out a big part of the market.

So it’s going to pay but selling low 20s seems mad to me. 20 is barely over 1pct a day on s&p

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Unknown
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February 6, 2018 at 1:50 AM ×

To be honest I think 22 odd on March vix future is a gift (to buy) but I am not sticking my money where my mouth as I closed my long vol futures while I wait to find out what’s going on with my svxy out option pay day...

Net net there’s going to be a lot of vega to buy and this vol ain’t dieing in one day. Previous spikes have seen 2nd month (mar) in 30s and 40s, and frankly I’m a little bemused as to why it’s as low as it is

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johno
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February 6, 2018 at 2:14 AM ×

Unknown, what are you talking about? I'm looking at UX2 on BBG right now and the last time it traded there (30s, touching 40) was in '10 and '11 when Greece was going to default on an unprepared Europe precipitating an abrupt Eurozone dissolution, which would have literally been a Lehman event, possibly bringing down the whole global financial system. Could not be a more different than the current macro backdrop. Since the '10-'11 regime, 2nd month has spiked to mid-20s only.

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Unknown
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February 6, 2018 at 2:37 AM ×

Why would you compare it to a low rates qe regime? What about going a little further back. Conceptually vix in 20s isn’t that high.

We just had a market event with vol blow up at the center, I wouldn’t short it until it was just crazy screaming obvious. Haven’t you noticed the massive vix call buyers looking for this event? THEy ain’t playing for 25.

I could of course be wrong, and you pays your money takes your choice. Good luck

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Nico G
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February 6, 2018 at 2:55 AM ×

those 10 years when people sold VIX non stop - through ETF x3

shorting convexity always bites, in one year, or in ten years like now

this is not over - last Friday i invited you 20% below

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IPA
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February 6, 2018 at 3:06 AM ×

Guys, with Shawn's last piece on vol we are going to get some new traffic here. Could you at least make it look like we feel somewhat sorry about what happened? Not talking about an apology. There are some pension funds out there which let a lot of people who are on fixed income down. Please extend some sympathy to those poor folks. I personally feel very sorry for them. Most of them don't really know what kind of toxic crap they had. This truly sucks!!

OK, with that out of the way. Is anyone feeling like a turnaround Tuesday? Markets are very efficient, well, not right now, but you know what I mean. I think a lot of pros will be sleepless tonight looking around to find most of the dead bodies. Once the morning comes we may actually have the count, and if it's not too bad, I say one dips a toe in for a tester long. So I say switch to very s/t charts and find a good hiding spot for a stop, but only if a pattern that usually works for you actually develops, then at least you could say that you followed your process and the plan. Just go easy, who the hell knows, this could really be LTCM-like rolling liquidation.

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johno
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February 6, 2018 at 3:11 AM ×

I could be wrong too. However, will note that the non-QE, high-rate environment of '04-'06 didn't see 2nd month contract spike to these levels. But it's certainly likely there are more reflexive aspects to the vol market now and I can't prove they won't get carried away.

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Shawn
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February 6, 2018 at 3:28 AM ×

Look, I'm sitting here with the financial tools that are the equivalent of a hammer and tongs--but take a look at the vol just on the charts above--there has to be a clever pair trade between VIX futs, S&P futs, and a great deal of other risk or FTQ assets that either have a lot of catching up to do or aren't going to do much in return when the gamma-blaze burns itself out.

I spent most of my kid's basketball practice reading panicky tweets about XIV and termination triggers. But I can't get my hands around why there should be any contagion at all here, especially when there is no existential crisis sapping liquidity from the market. And at the end of the day we're talking about two screwy 2bn USD ETFs that the world won't miss at all.

While this may eventually prove to be foreshadowing the market's undoing, I'm with Johno on this one...I don't think we're there yet.

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Unknown
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February 6, 2018 at 3:35 AM ×

It’s just guess work but the true exposure was much greater than 3bn - very substantial short interest and option exposures mean the true extent of the loss is probably 3-10x as high, so will be other liquidations.

All that vega may have found a home, but it’s at least plausible there’s some sellers remorse. I don’t think this lasts for ever, ltcm shock probably decent comp

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IPA
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February 6, 2018 at 3:41 AM ×

Almost forgot what the hell I wanted to say in the first place. One is allowed to change his mind and do it often. I would like to draw everyone's attention, well, at least the ones who can pay attention to anything other than Vol tonight, to WTI daily chart. I really, really believe that tonight/the new Globex session is a carbon copy of December 7th. Hear me out... The decline from the top was 5.3% back then and we are almost there (looking for a slight overshoot on the end-of-the-world sympathy decline overnight). Price breached 21ema only for a day and came close to touching lower BB but did not. Also, the bottom of the channel was there as well to support it. All of those criteria are setting up at around 63. I am going long, my friends, at 62.80 (if they let me) and probably look like a complete idiot for missing the most recent quick drop. Would not be the first time :) Target 70 with a stop at 61.65

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Nico G
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February 6, 2018 at 3:51 AM ×

IPA

sorry for the folks 'who did not know' - absolutely - at every cycle, every bubble, unregulated entities sell crap to mom and pop while the regulator looks away

CDOs, car loan CDOs, cocos bonds, 3x short VIX, there is a disclaimer at the end of the page. It says 'you could lose everything'.

But still, this is a gigantic failure of both SEC and CFTC who refuse to regulate i.e. who refuse to cut brokers fees by 70 or 90% by shutting such activity (just like they shut Wells Fargo now, only 10 years too late)

blame the regulators, blame the bonus payout scheme, blame Deutsche bank who pays $1.3bn bonus amid record losses, just like you had to blame Greek banks and Italian banks for stuffing retails with $100bnxxx or consumption loans

it is not a crime to be hopeful and naive households when a bank or fund sells you palm tree performance but it is a crime to sell leveraged / short convexity shit to those people, shit that has been engineered by top PHDs guys who know better then them.

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Nico G
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February 6, 2018 at 4:03 AM ×

"It was a time of terrible suffering. The contradictions were so obvious that it didn’t take a very bright person to realize something was terribly wrong. And people blamed themselves, not the system. They felt they had been at fault. People who were independent, who thought they were masters and mistresses of their lives, were all of a sudden dependent on others. Relatives or relief. People of pride went into shock and sanitoriums. My mother was one.

What I learned during the Depression changed all that. I saw a blinding light like Saul on the road to Damascus. Up to this time, I had been a conformist, a Southern snob. I actually thought the only people who amounted to anything were the very small group which I belonged to.

The Depression affected people in two different ways. The great majority reacted by thinking money is the most important thing in the world. Get yours. And get it for your children. Nothing else matters.

And then there was a small number of people who felt the whole system was lousy. You have to change it. The kids come along and they want to change it, too. But they don’t seem to know what to put in its place. I’m not so sure I know, either. I do think it has to be responsive to people’s needs. And it has to be done by democratic means, if possible."

Virginia Durr, Recollection of 1933

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johno
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February 6, 2018 at 4:38 AM ×

Flattened out rest of position at decent levels (26-27-handle in Feb futures) and have just been watching. Tomorrow morning we see whether position liquidations continue ... if not, I think VIX futures are a sell. We'll see whether there's substance to the spooky talk ...


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Shawn
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February 6, 2018 at 4:47 AM ×

"Guys, with Shawn's last piece on vol we are going to get some new traffic here."

Allow me to translate....hey, we have company coming over, clean this place up and could you kids please, just this once, try to make a good impression?

But to the point on what IPA was getting at--the reflex towards schadenfreude--misses the scope here. I think that was true of the dot.com bubble and certainly the housing bubble, where people's homes were at stake. Who is really feeling the pain on this one? Unlike those two bubbles, I'd be hard pressed to find anyone I know outside the business that knows the difference between a vix future, a FroJo future and back to the future.

Maybe I'm wrong and this issue/leverage sparks a financial brushfire that costs regular folks a bunch of money. Time will tell, I guess.

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Shawn
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February 6, 2018 at 5:01 AM ×

hmm, at least I was right about the pairs trade. Any bets on where ESH7 goes out at the NY close tomorrow? Closest to the pin wins a beer at the next TMM2 confab.

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checkmate
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February 6, 2018 at 9:43 AM ×

I've just been quietly enjoying the Bitcoin fiasco. It's just a real classic 'they never learn' situation. You tell people there is no fundamental value ,it isn't an asset as you know it, it's only worth what the next fool is willing to pay you for it, and they still find half a dozen spurious reasons to tell you why you are wrong. Funny thing is most of this stuff springs from the loins of people who have been shaving for less time than we have been using our Zimmerframes. There's a reason why I don't subscribe to giving the vote to young people and it isn't because I don't like young people (I was one once). That is ,it takes time x experience to know much of anything worth knowing. There is no short cut really unless of course you are willing to accept that premise that being young generally does mean being wrong when you are arguing against experience.
I wonder the aggregate age of the vol wonderkinds ?

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Unknown
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February 6, 2018 at 11:56 AM ×

hmm, I just don't think the delta has been covered, nor have you seen the effects of joe punter going from hero to zero

2500

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IPA
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February 6, 2018 at 12:59 PM ×

@checkmate, buying gold was my second best trade theme of the year on the back of my other prediction of the year - possible cr(a)ptocurrency crash due to an all-out assault by the govts. Some here doubted my thesis on why the regulators would take on the task of reining in the unruly kids. You wish they were tough on vol ETFs as well. I gotta say, I am really surprised shiny metal is somewhat stationary here, especially considering the latest vol events. Still think it breaks out and goes to 1400 when DXY bear flag is resolved lower.

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checkmate
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February 6, 2018 at 12:59 PM ×

Out of interest what was the yield on SP500 before this flush? What was that vis a vis US 10yrs?

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checkmate
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February 6, 2018 at 1:10 PM ×

IPA,
I suspect Gold may be static because it isn't a straightforward bolt hole for fear without any caveat. In this case I think that caveat is rates have not been going down anymore have they? In which case the carry on gold perhaps becomes more important than it's 'bolthole' attraction.
On that note it occurred to me that in the mad rush for equities on the back pf Trumps fiscal policy was anybody looking anymore at the yield on blue chips vis vis US govt yields?

I'm inclined to think of this as this as follows, the reciprocal act for looser fiscal policy should have a presumptive tightening of monetary policy. The recent increase in rates preempting the FED might simply be a way of bond markets telling the FED you're out of step. If you don't counteract fiscal policy then we assume it increases duration risk and we want paying for that. Then as this proceeds risk spreads really matter once again.
It occurs to me that if bad economic news was welcomed by risk markets have we now not transitioned to the point where good economics news equates to bad market action as it signifies a need for more central bank tightening? I mean we didn't get to this point because central bank liquidity didn't matter did we?

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Leftback
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February 6, 2018 at 1:11 PM ×

I really don't know what's going to happen today, which is why we are just going to sit and watch. Most of the worst mistakes get made just after you have had a really good trading day, and since we did, we are going to sit on our hands here. Happy to no longer have a position in SVXY, as I think there is a danger of some kind of regulator "fudge", "reset", "bailout" today. Don't ask me how - but who can trust the SEC or the exchanges? This question in itself is an indictment of our manipulated markets, eh?

Very interested now in watching reaction in the credit markets, which are more connected with the real economy, and as Shawn points out no alarm there yet. The DX is a little stronger again but FX is fairly quiet all things considered.

@checkmate: yield on the US10y was slightly higher than yield on SPX as of Monday morning.

There are intricate connections between different components of the ETF universe. I don't think this is a one-day wonder, but as Macro Man would say right now I don't have a Scooby.

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February 6, 2018 at 1:16 PM ×

Anyway, just heard word that there has been some drama in the "NY cigar club" during yesterday's mini market crash. Frenchy has cost them plenty!.....were talking the type of plenty that you wish you could earn during a 87 style market crash with more index puts on than smarties thrown around inside a day club in Paris.

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February 6, 2018 at 1:25 PM ×

This market has become my little racehorse again. Low wages( welfare ). Solo runner. And tipping to the same old same old. My pleasure is.....no "NY cigar club", not ever!

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Leftback
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February 6, 2018 at 1:42 PM ×

The small caps look incredibly ugly in the pre-market. At some point, that starts to matter, but not today. Spoos look likely to re-test the lows of yesterday before a possible bounce. I think there will be a lot of media pressure here to Buy The Dip, but I also think there is a danger that this would be a Muppet Buy, as a quiet day or two may be followed by more de-risking.

Three ways to look at Treasuries here...

1) "rates are going higher b/c of inflation and the Fed", um, OK - if you want to believe that.
2) large short position across the curve is in danger of reversing due to portfolio de-risking.
3) purely technical - yesterday was a classic reversal candle in TLT, indicating a change of direction for a while.

For now I am going to go with (3) but I think it will be noisy.

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Jim
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February 6, 2018 at 2:24 PM ×

Terminating $XIV
https://twitter.com/vixcontango/status/960879625797820417

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February 6, 2018 at 2:27 PM ×

Hey Lefty, whats Trumpy going to do each morning with himself if this is the top of the market for the rest of the year. He is going to run out of people to put on the twitter "shit list" sooner than later.....and there will be no "stock market at all time highs" to spruik about. A bored Trumpy is not good.

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Shawn
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February 6, 2018 at 2:48 PM ×

nothing to see here people....move along...

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johno
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February 6, 2018 at 2:52 PM ×

That "you have to have your head examined" trade was worth >12 points on the front contract. Closed out now.

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Unknown
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February 6, 2018 at 2:56 PM ×

fair, vol does seem supressed to me, but as of right now I was totally wrong.

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Shawn
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February 6, 2018 at 3:27 PM ×

looking good for 2660 at the close....always amazing on days like this when a call for a 60 pt rally not only seems like it was reasonable, but perhaps too conservative. s

Still amazed by how quiet the market is outside of the gamma blast zone.

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sdot54
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February 6, 2018 at 3:50 PM ×

It's so narrow (the part of the market that has been impacted) maybe contagion will catch on in a few weeks or months, but it just seems damn near orchestrated (not trying to go all conspiracy theory on everyone). This couldn't have been triggered by Jillian forest group in China deciding not to pay off its perpetual bonds could it?

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johno
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February 6, 2018 at 4:39 PM ×

Well, wasn't unreasonable to be skeptical of selling vol, and since my last post (when I thankfully closed out), the front month has rallied >6 points. All the flows related to the ETF/ETNs that blew up yesterday occurred yesterday, but now we see how much institutional vol strategy unwinds we get ... really, the trade was clearest yesterday after-the-close because it had the look of massive forced liquidation. It's a harder call now, though my guess is vol eventually comes down to match the macro backdrop after a hard-to-know amount of paced liquidations. Anyway, I'm talking here about an asset class I hardly know, at all. As good as my trades in VIX futures have been the last day, they were sized inversely to my ignorance, i.e. sized small. So nothing to brag about really.

About the victims of this, IPA, for my part I tried to help them by airing my strong concerns about these products years ago to an SEC official. Wouldn't be surprised if others here did the same. But the SEC is a securities lawyer employment program and probably revolving door to the companies that create these products. I'd say they're more interested in creating burdensome paperwork that is extremely costly for me and my counter-parties to process to "protect" me (who has some clue WTF he's trading) than protecting smaller retail investors who want to trade derivatives of derivatives of derivatives but who can't be bothered to open a futures account ("because futures are dangerous" they'd say). As for pension funds, the return assumptions were set too allowing for too-low contribution levels and too-early retirements ... now they're under-funded and some are doing stupid sh1t to correct for the original mistake of setting those aggressive return assumptions.

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johno
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February 6, 2018 at 4:41 PM ×

... return assumptions were set too high allowing for ...

(clarifying above)

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Buy Stocks
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February 6, 2018 at 5:30 PM ×

I for one am happy to see short vol blow up and it's participants mostly bankrupted. Frankly people trading this sorry excuse for a strategy either knew the risk (thus I have zero pity) or were stupid (again I have zero pity). Looking forward to volatility making a comeback & making higher returns (trading equity indexes) in one week than most macro managers make in a year :)

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Unknown
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February 6, 2018 at 5:54 PM ×

what an awesome couple of days, those svxy puts did pay even if the svxy did surprisingly better on the nav front than one would have hoped. Sadly the SVXY abomination lives on.

I guess it didn't start the end of the world.

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johno
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February 6, 2018 at 7:04 PM ×

Hmm .. this market keeps gently falling. My mental template is that awesome open -200 followed by rally continuous through the day of 500 points back in '97, when a certain speculator's short put positions were liquidated at the open. This action doesn't adhere to that (probably over-simplified) template ... suggests all those vol-targeting types are a material uncleared overhang on the market.

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Leftback
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February 6, 2018 at 7:55 PM ×

Would have to say we are probably going to see vol bleed back lower over the next week and into expiration. Simply because.... that's what the VIX does, it spikes and then bleeds lower. We do have a TINY punt on, expresses that view at the moment.

Otherwise - just watching. A gradual 50-61.8% retrace of SPY from yesterday's low would surprise nobody here, am I right?

Well played, Unknown, very glad that it all worked out. I had my doubts for a while. The short vol strategy was a brilliant one in 2009, and became progressively less inspired until recently when it became insane. As the quality of the strategy declined, so sadly did the IQ of the punters involved. Shocking that Real Money became involved, people need to be fired.

[Chad here: "Hey! It was a cool ride while it lasted. Me and my bros made bank, last year was Awesome, the Performance and the Bonus!. The pool parties, the interns.. we were rock stars for a while. Too bad it had to end this way No idea how much we lost, since we are now all out of the building..... Apparently Risk saved the Fund by shorting our position. Gnarly, man."]

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Shawn
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February 6, 2018 at 8:36 PM ×

http://www.epsilontheory.com/too-clever-by-half/

I'm not sure if Chad is a coyote or a raccoon. It's so easy to say raccoon, but you need coyote-like skills to sell short-vol as an asset class to pension funds. Regardless, the end result is still a long whistling sound followed by a dull "thud".

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Leftback
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February 6, 2018 at 9:03 PM ×

Another decent day. A tiny punt on VXX dribbling lower worked out well, very easy money, in and out.
Just buy the dip. Now we sound like "Buy Stocks".

Reversal candles everywhere you look... might be time for bears to hibernate until options expiration.

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Buy Stocks
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February 6, 2018 at 10:44 PM ×

Good to see LB is learning fast :)

Nico, did you grow a pair and BTFD as I suggested? haha

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Shawn
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February 7, 2018 at 12:53 AM ×

so as of about 11pm US time last night, 4pm NY predictions had one bull 2660 and a bear at 2500. We went out something like 2685.

Amazing how a 160 point interval--roughly 6%--seemed reasonable from both sides. I former colleague opined today that vol will come back down, but this event won't be forgotten, and the "new normal" for suppressed levels of implied volatility will settle higher than previous lows as this day's memory is 1) seared into the memories of traders, 2) seared into the memories of VaR models, and 3) seared into the memory of risk managers.

Just another day at the office in FX. Roughly 1% round trip in eur and jpy. Not even worth mentioning to the wife over dinner.

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friendoshawn
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February 7, 2018 at 1:17 AM ×

T+1, to be sure, but I'm not sure you could have asked for a better outcome for risk markets. Bubbles don't happen without leverage, and short vol as a strategy (NOT, people, as an asset class) was the most evident leverage out there. So now Risk Parity has egg on its face, the FOMO crowd has rediscovered the joys of fixed income (maybe even credit), and we might have a whole week without talking heads complaining about "valuations". Until Harriet Homeowner gets more than -2.5% real return on her cash, assets are going higher.

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checkmate
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February 7, 2018 at 11:49 AM ×

The $BPSPX at this level implies historically that the market would usually be happy to consolidate a flush like this by closing the many gaps that are now open before it takes a further decisive direction. We've all seen the occasion when gaps stayed open ,but that isn't the high probability play after a flush.

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Nico G
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February 7, 2018 at 11:55 AM ×

Buystocks no offence but i would not trade on anyone's 'suggestion' not even Dalio's which on the long run are probably better than yours and mine. The other technical difficulty being that your suggestions come with a 100 point or 2/3 day delay since we can not afford to pay for access to your real time update.

From personal trading experience i can not touch the Spoos short, i'll tell you why: I can not afford to end out of the game in the unlikely 0.0001% event of a straight follow-through to 2300. One thing is a bad entry, but a totally other thing is a bad exit when still at a loss you time a contrary move (bounce) hoping to reset your position (higher) but the market keeps going your way. Without you. All the way to your target. It has happened, and the feeling is worse than DEATH.

Spoos will retrace some, but globex low retest is in the cards and probably much lower. Neurotic tiger phase like this ain't easy to trade since most models traders rely on have been calibrated on sloth mode in 2017

I did bought my Eurostoxx short at yesterday's auction to reduce global exposure. I keep that one tactical, dynamic. Shorting Europe in/out for 100 point segments on multi week horizon has been continuously profitable since 2007. Next segment of interest is 3479/3379 if you want to play some.

Referring to the discussion with IPA for present account those Europe swing short campaigns made about 10x the money currently drawn down on Spoos short. All converted throughout in GBP which helps tons. Nothing has changed in Europe(stoxx), no Trump, no tax cut no momentum going for itself. It is an easy bear market, shame noone's trading Europe around here.

Trump cult proved more powerful than initially thought. The bet is still that Fed QT/rates up will outdo Trump tax cut. It will prove right in the end (hence why i keep the position, IPA) but it will take a lot to bend current market sentiment. If you talk around it feels like the February 10% flush did not happen. I see no fear on the market at all. The VIX move is only short covering and not about fearful people trying to buy portfolio protection.

The good thing about the last weeks is that bitcoiners have finally shut the hodl up.

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Mi Pa
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February 7, 2018 at 1:25 PM ×

well, bitcoiners are cheerfully on hodl yet again today

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Buy Stocks
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February 7, 2018 at 3:53 PM ×

Dow futures are only up +600pts off the overnight lows (BTFD). The cash index barely up +1% in an hour - frankly I feel hard done by :)

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Leftback
admin
February 7, 2018 at 4:58 PM ×

More bleeding down for the VIX and drifting up for the Spoos lie ahead of us into expiration.

The fantastic trade of the year for LB and Unknown comes at the expense of LJM partners of Chicago, among others who had set up shop apparently exclusively shorting vol:

https://www.zerohedge.com/news/2018-02-06/chicago-vol-selling-fund-blows-down-more-50-after-significant-losses

The genius behind the strategy explains the complexity for us simpletons:

https://vimeo.com/117314441

There are so many people like this in finance now. Some "quant" background, but limited real world market experience. Well, this guy now has additional experience to add to his resumé.

In other news, WTI looks like it is going to roll over (again) on US production spike. The ECB's Nowotny has just labeled Mnuchin a currency manipulator. DB is trading like GE - both of them are loaded with accounting issues and bad assets. There are more problems ahead, but for now, let the Muppet Bounce continue, and you know "Buy Stocks".

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Belektron
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February 7, 2018 at 5:04 PM ×

Wont be long until rising UST yields are back in the headlines. Days, hours?

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Leftback
admin
February 7, 2018 at 6:17 PM ×

The dollar is "surprisingly" firm today. A lot of us had been pointing at $1.25 as a line in the sand for EURUSD, as the ECB has no wish to see a strong €, or for bunds to blow out and rip its balance sheet to shreds. We have become used to Death of the Dollar headlines in the media, and when they accumulate, Bucky almost always rises like Lazarus.

A prolonged reincarnation for the greenback is almost always negative for the commodity complex and associated FX. AUDUSD looks soft AUDJPY is having a horrible day, this is an FX proxy for China's real economic temperature and commodity demand (China GDP being fake). CADUSD is also flaccid, Caddy often serves an indicator of the outlook for oil and lumber prices. LO and behold, crude is surprisingly weak, down 3% on the day.

Is this a turn in the dynamics of inflation expectations? The two main drivers of US inflation have now turned around in the disinflationary direction. If this continues, then the reflation trade will be over and the US yield curve is going to flatten again. We are reminded of other episodes of Faux-Flation, especially the Green Shoots period of 2010, when US10y tagged 4% in the Spring before falling >100 bps. That Spring saw several massively crowded trades, especially short Treasuries.

Extremes in speculator positioning may soon lead these currently very crowded trades to de-lever:

1) Short dollar trade.
2) Long crude trade.
3) Short UST trade.
4) Long EMs trade?
5) Short Eurodollars.

I think we can safely say that "short vol" has had a good clear-out and we are not going to have to worry about that one.

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Skr
admin
February 7, 2018 at 8:59 PM ×

I am a little surprised at some of the more prominent technical posters missing the H&S on the daily Gold chart.

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IPA
admin
February 7, 2018 at 9:11 PM ×

@Skr, and not just that...

Spent most of the day in front of the mirror. I got no answers. SOB would not talk.

Don't laugh. You trade for living? Watch "Trader".

@LB, we do the best we can to identify as many trading opps as we can and then we pull the trigger when we can on what we can. BUT, we can't be in ALL trades ALL the time.

With these words, I leave you, dear friends, and this wonderful trading fantasy land. Time to regain my focus.

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Skr
admin
February 7, 2018 at 9:17 PM ×

I hear you broh! Just trying to help out. Go out and enjoy yourself.

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Nico G
admin
February 8, 2018 at 1:38 AM ×

Well those last years i have seen more disco bounces that this one that has all the feel of a dead cat. This market feels broken. The VIX folly has been exposed and will cascade further. From dip buyers to rip sellers. After all whoever CSFB hedged its short vol book with, will now please stand up and cover their ass.

What other bloated financial engineering niche will explode next? I have

- Loan ETFs in mind.
- And car loan CDOs.
- And cocos bonds.
- And student loan not far behind.

But second and foremost to volatility, we have high yield. Mauldin:

"I think ultimately the collapse in high-yield will precipitate “the Big One.” You just can’t understand how much in high-yield bonds has been sold, how poorly the covenants are managed, and how badly investors are going to get screwed.

You watched this last week as the VIX fell out of bed. I am telling you that what is going to happen in the high-yield market is going to be more – much more – of the same. It’s going to seemingly fall out overnight. The bids are going to disappear, and high-yield bonds are going to be sold to what are essentially distressed-debt funds at distressed-debt prices.

Further, as we get into late 2018 and then into 2019 (not to mention 2020), the amount of high-yield debt that has to be “rolled over” becomes significant. And it is obviously going to have to be rolled over at higher interest rates. "

He also noted that among the yield hungry holders of SVXY Harvard management came out. So really, even HARVARD was shorting volatllity. Them too listened to Dalio and the meltup idiots too much. This system is really screwed when even the brightest one threw safety down the toilet.

If you do not take profits on that short lived bounce after such a dire warning by le Market there will be noone to blame but yourself. A new batch of naked swimmers will wash ashore at next low tide (a befitting metaphor seeing the magnitude of Indian ocean tide here in
East Africa).

I am reshorting Europe(stoxx) first thing at auction and will watch the show. Deutsche bank will not survive the next bear leg, and will take a couple of counterparts with them. We're talking trillions of OTC derivatives notional here.

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Nico G
admin
February 8, 2018 at 1:42 AM ×

PS: Buystocks for all your bad manners you are plagued with, you are the symbolic mascot of the QE/Trump rally era. So your own blindness is a tell, because it is the very right measure of market sentiment we need here in our board. I will only think of covering my short the day that your spirit is broken. At the same time, i will not feel good if you lose money. So try to educate yourself here. We are doing an intervention. You are a junkie and you need help. good luck

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Nico G
admin
February 8, 2018 at 1:54 AM ×

PSS: sorry for posting so much but much like Skr lamented the lack of attention on gold tape, i have to say all the technicalities mentioned in comments those last days overshadow the one big elephant in the room of a headwind to global economy and risk assets appreciation:

TRADE WAR

the America first mantra will only accelerate once the US are hit by financial difficulties, no matter how many times Trump tweets that 'the stock markets are wrong, they should cheer the $22t debt expanding, nevermind if i called it a folly at $20t when interviewing for this job"

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Mi Pa
admin
February 8, 2018 at 8:29 AM ×

Deja Vu by Nico,we will see if you are right this time...I do not think so, not yet anyway.

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Eddie
admin
February 8, 2018 at 9:49 AM ×

@Nico: I would add (corporate) bond ETFs to your list of worries. Providing a liquid wrapper for a rather less liquid underlying is a precursor that interesting things will happen imo (similar to combining leverage and stupidity).

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February 8, 2018 at 10:33 AM ×

"TRADE WAR" you say Nico. Not a chance , ((they)) use other traders. Let'em get ((Paris and tinkerbell)) to trade their gold index futures. Clowns the lot of'em.

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checkmate
admin
February 8, 2018 at 11:10 AM ×

There are variety of things that might go wrong, but I'll stick with risk spreads.That would obviously include hitherto very popular investments in High Yields/ Junk. Which is another good reason to have slowly reduced and moved remaining allocation to short maturities where value could be found. In truth not much of that in the last year.

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Nico G
admin
February 8, 2018 at 11:30 AM ×

yes Eddie i forgot the most obvious last November i wrote in another place that European corporate bonds was the next big short (the easiest punt)(something much easier to trade than the VIX world) to the point that it had reached the same no-brainer, dead end compression than 2007 CDOs

Peak insanity was reached on November 16th when French BBB issuer Veolia issued:

500 million
3-year EUR bond
maturity November 2020
with a negative yield of -0.026 %

No typo here, it had never happened before. Forget industrial risk, forget any risk at all in fact, PAY those people to give them your money.

funny thing being French is that Veolia is a spin off of bankrupt Vivendi (NYSE code 'V' lol) the very symbol of 2000 internet blind greedy agressive (un)tactical reconversion model that led to the most spectacular crash for a French big stock in 2000. The Messier era is still remembered in France. In a way it sucked because all them old school French patrons could go 'i told you so' on the new brash, youngblood risktaking mentality that was only short lived.

the uneasy feeling prevailing in Europe corporate yield has to be the one reason capping equities all this time (strongish EURUSD does not help much either)

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February 8, 2018 at 11:39 AM ×

"Peak insanity was reached on November 16th when French BBB issuer Veolia issued:

500 million
3-year EUR bond
maturity November 2020
with a negative yield of -0.026 %"

When the ((French)) House was underwriting this bond, Nico. I was on an island somewhere in South East Asia enjoying my inheritance for a my time at the desk that was ridiculous and beyond the blue 7 seas impossible.

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February 8, 2018 at 12:08 PM ×

Nico, the French House bond underwriter....


Bond Covenant as follows:

To the holder of this inheritance you are given the following amount as payment for 15 years of wishful thinking. In accordance to previous worldly phenomena's before you receiving your final coupon and maturation value of bond , you are entitled to keep the lot. As supermodels and actresses have two legs and two arms to be able to go out into the world and get their own.
In accordance to article 88 of the Nuremberg convention you are now a free man.

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February 8, 2018 at 12:44 PM ×

Nico, no its not funny. Fifteen years of wishing thinking is not funny!
What is funny , is I got out of it without kids and a wife ( or failed marriage, who knows).
Can you imagine having kids half grown up and a wife that is conditioned to that lifestyle , and having to drag them through this ((market)) correction. Sorry, but you just gave me the heads ((up)).

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February 8, 2018 at 12:46 PM ×

No bastard, is going to tell me where I am going the next 15 years.

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Nico G
admin
February 8, 2018 at 1:24 PM ×

you are the Quincy Jones/Tom Waits mix of financial blogs

add two drops of HSThompson to that

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Leftback
admin
February 8, 2018 at 1:55 PM ×

I have often wondered if Amps was a reincarnation of HST. Absinthe + mescaline + LSD = psychedelic financial commentary.

Looks like Carney is wearing the Hawk costume again, LOL. Jawboning has long been the tool of choice for the BoE in order to nudge inflation around.

Crude oil is slightly lower again today, let's keep an eye on that one. A few weeks of lower oil would nip the inflation scare in the bud fairly quickly. More important US inflation driver than the tiny hourly wage increases (with hours worked lower!).

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February 8, 2018 at 2:05 PM ×

Lefty, I will get whats owned , and then ((they)) won't see me for dust. I can trade this shit and live happily in a grass hut beside a South East Asian beach. I've seen enough.

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February 8, 2018 at 2:57 PM ×

Little Lefty, if you could just hand over what Kerry left me , and I'll be on my way.

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