Thursday, August 10, 2017

Meltdown Sequence Has Been Initiated

"The markets have been coiling so much. One way or the other, [the 10-year Treasury yield is] going to have to break to the upside. And when that happens it’s going to raise volatility in the market"

Wrong bond guru. Treasury yields are breaking to the DOWNSIDE, forcing carry trade unwinds as rallying Treasuries and USDJPY are a RISK OFF global pair trade: 


ZH: One Day VIX Surge Could Bring Meltdown

The 1-day percentage change is a big deal in the VIX complex because the levered and inverse VIX ETFs and ETNs rebalance daily based on the percentage change, and some of the thresholds for forced unwinds are based on the percentage change.  This is why lower vol creates higher risk.

The biggest S&P 500 selloff when VIX was less than 12 was 3.5% (Feb 2007)"

Here we see that volatility was recently lower than 2007 and the acceleration ratio of second derivative volatility to first derivative volatility is higher now than it was back then. Meaning that the spring is coiled tighter than ever:

Lower pane is one day % change in VIX:

Inverse vol has given back three months of gains in two days:

No sign of panic whatsoever

TRIN: Selling pressure

One thing to note is that volatility "rebalancing" via ETFs occurs overnight as we saw in 2015 and again during Brexit:

Weak 'Conomy and misallocation of capital claims another cycle...