Republican businessman Herbert Hoover, was elected in 1929 amid record U.S. wealth inequality, and a stock market that was already in a big, fat, ugly bubble. Nevertheless, salivating at his business-friendly platform, the stock market went straight up, overheated, and then crashed in October that same year...
Deja Vu of 1929, today's volatility sellers are betting that stocks have reached a new permanently high plateau. The average intra-year drop for the S&P 500 is 14%. That's no longer an option. In other words, a decline of the magnitude seen in 2014, 2015, and 2016 will now implode the casino...
For his part, Trump plays the role of the business-friendly president, embracing any and every policy that throws the middle class under the bus. The faux is in the hen house:
"I think things are just fine the way they are"
Trump's off-hours role is herding sheeple towards the cliff:
And starting wars on Twitter
Deja Vu of 1929, today's volatility sellers are betting that stocks have reached a new permanently high plateau. The average intra-year drop for the S&P 500 is 14%. That's no longer an option. In other words, a decline of the magnitude seen in 2014, 2015, and 2016 will now implode the casino...
For his part, Trump plays the role of the business-friendly president, embracing any and every policy that throws the middle class under the bus. The faux is in the hen house:
"I think things are just fine the way they are"
Trump's off-hours role is herding sheeple towards the cliff:
And starting wars on Twitter
Back to the permanent plateau:
Volatility shorts have not been forced to cover since Brexit. The largest decline in the past year was -5%, right before the election. Hence over-confident volatility sellers have massively increased their bets on continuing low volatility even as the casino has reached ever-higher (over) valuations.
In doing so, they've increased the sensitivity of the volatility complex to small moves in the S&P 500. A large percentage move in the S&P 500 will now implode the inverse VIX ETFs:
Second derivative volatility as a ratio of the VIX is record bid due to the massive volatility short position:
Furthermore, for the past year, by increasing their short volatility positions on every market selloff, they've been actively suppressing market volatility. They've not been forced to unwind their positions. Yet.
Why? Because they've been constantly bailed out by the BTFD team, most recently in September. Whereas every other decline in the Nasdaq saw a spike in selling, the September dip saw only heavy buying:
Here is where it gets interesting...
Volatility sellers only control the VIX futures, they don't control the spot VIX itself, which is derived from implied volatility of S&P 500 front-month options. Hence in the event of a larger selloff, these vol sellers will be trapped by backwardation. Meaning the VIX will spike above the artificially suppressed futures.
When that happens, vol sellers will become vol buyers and they will force massive short-covering across the volatility complex, which in turn will drive selling of the S&P 500 futures. Which will drive more buying of volatility futures etc. etc.
Say for example, because the Nasdaq rolls over again:
Or because EM stocks go RISK OFF again
Or because it's the end of the cycle again and gamblers are over-exposed to the fake reflation trade:
Or, it's just that time again
Or, because the Fed is rolling off their balance sheet for the first time since 2011:
The key point is, the proximate reason for selloff no longer matters. Trees don't grow to the sky and those who are betting that markets will never fall ever again, are going to learn that lesson the hard way.
September FOMC:
"In October, the Committee will initiate the balance sheet normalization program described in the June 2017 Addendum to the Committee's Policy Normalization Principles and Plans"
