Thursday, May 11, 2017


Occupy the new permanent stock market plateau, in which 1% of the stocks account for 100% of the gains, while 99% of stocks lose a commensurate amount. Remember to act surprised when it all implodes with extreme dislocation...

Due to record low VIX, hedge funds are capitulating - no one's hedging anymore. Chalk it up to hazardous immorality and a desire to protect the P&L and one's job over protecting client assets:

"There are times when an investor has no choice but to behave as though he believes in things that don't necessarily exist. For us, that means being willing to be long risk assets in the full knowledge of two things: that those assets may have no qualitative support; and second, that this is all going to end painfully." 

Over on Zerohedge, one guest blogger asserts that low volatility is of no concern to markets. He says that it's a sign of impending capitulation by stock market bears. Conversely, I suggest that it means impending disaster for $60 trillion in unhedged global stock market capital. Slight difference...

I won't dissect all of his arguments, however, I agree to the extent that in the derivatives markets there are parties on each side of the trade and it's not always clear who is hedged and who is speculating. Furthermore, the CBOE option skew tells us that speculators have been very actively betting on a MAJOR market crash, although they've cut back a bit recently:

Introduction to CBOE SKEW Index ("SKEW")
The crash of October 1987 sensitized investors to the potential for stock market crashes and forever changed their view of S&P 500 returns. Investors now realize that S&P 500 tail risk - the risk of outlier returns two or more standard deviations below the mean - is significantly greater than under a lognormal distribution. The CBOE SKEW Index ("SKEW") is an index derived from the price of S&P 500 tail risk. 

Skew versus VIX: Speculators are very worried, hedgers are very not worried:

Skew 8 week moving average:

We've seen this movie before at key turning points:

Skew/VIX ratio:

Unlike, Skew, the VIX on the other hand tells us that for eight years straight, hedging capital has been a losing game, which has led to hundreds of billions in outflow from active management to passive ETFs - a trend that has accelerated since the election:

"passive funds have seen inflows of $563 billion over the past year, while active funds have suffered $325.6 billion in outflows."

Ironically, a low VIX makes it impossible to profitably hedge, due to futures "contango", meaning the back months are more expensive than the front month, causing continual rollover losses:

Nevertheless, the argument that low volatility implies low risk is totally asinine and unfounded - because having upwards of $60 trillion in global stock market capital unhedged, is a recipe for total fucking meltdown...