Market Intelligence

Mid Term Elections, VIX implosion, Credit implosion, Crowded Trades

Author: Aleksandar Adamovic November 7, 2018

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Asian session rather a non-event. Most interesting is to note the fall in Nikkei VIX; VNKY, down 8%.

This theme probably continues…From a post end of October. Given the (still) elevated levels of volatility, things could get rather tight if the crowd decides the protection they had to buy is too expensive. Watch possible inverted panic moves as investors could start deciding dumping expensive volatility.

Ask Brokers : Look Beyond The Fearful Crowd

5,5% from recent panic lows. It is sitting right at the 200-day average. Seems we will do the 2700/2800 consolidation here for some time. Inverse panic in volatility could be happening as VIX shorts got all shaken out at lows. As Nassim Taleb once told me: “Never buy vol when you must, buy when you can”.

Spain, everything under the Sun… The Supreme court decides that the client pays the mortgage tax after a hard debate and by 15 votes to 13.

The high court changes its criteria after 15 hours of discussion over two days about who should pay that fee.

Credit / iTraxx selling off as ppl dump protection, trading at levels last seen in early October.

Credit vs Eurostoxx vol index, V2X. Sure they are “different” things, but the protection element is in both. iTraxx vs V2X gap has been widening during this last bounce/consolidation. Vol puke to resume?

EUR putting in a rather big candle so far as it takes out the trend from late Sep.

SX5E term structure coming in. Chart today (orange) compared to 1 week ago (green).

EEM US trading up 1.5% in pre-market. If it holds will open above the 50 day as well as the negative trend that has been in place the entire year. Note this space has not closed properly above the 50 day nor the trend during pretty much the entire year.

Last time VIX traded here was in mid-Oct. Back then Spuz traded around the 2820 lvl.

MAX pain continues – Nomura.  Expect a “near-term tactical pain-trade HIGHER for U.S. Equities, almost entirely due to the past month’s gashing of “market” exposure from the fundamental community throughout the performance drawdown,” which forced “net-down” / “gross-down” / “beta-down” behavior, and which accelerated particularly over the final week of October.  To underscore this point, he observes that since the start of October, his hedge fund L/S model has seen at least 9 sessions of greater than 50bps of underperformance vs SPX out of a total of 27 trading days, confirming that for hedge funds the latest market whipsaw, first sharply lower then higher, has been pure torture.

And it’s not “just” a Hedge/Leveraged Fund struggle: overall Asset Managers have sold down -$91B between SPX-, NDX- and Russell- futures over the past month, shown in the charts below, amid a near-record deleveraging/degrossing.

The “fundamental” active equities universe “has essentially become a source of synthetic “short gamma” in the market, as with any rally in stocks, said performance-burned funds effectively “get shorter” the higher Equities travel, in-turn contributing to these violent bear-market rallies on “up” days, with funds grabbing exposure “dynamically hedging” futures on said move.”

Inverse panic in vol continues.  SPX term structure continues imploding. Green a week ago, blue 2 days ago, orange today.

Source: charts by Bloomberg

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