We Know How This Ends. Instantly.

Only ten years notice...

This final melt-up is powered by volatility compression funded by colossal one-sided bets on indefinite low volatility. The result is hypersensitivity to small changes in the S&P 500 amid unprecedented leverage. Since zombies don't panic, machines will do it for them. Just another benefit of artificial intelligence...

Something happened to the volatility complex in late August that drove this past month's melt-up rally. The volatility suppression algos used unprecedented leverage to contain the August selloff and power the S&P futures higher, via volatility arbitrage, which means selling volatility futures against long S&P futures. Which isn't technically arbitrage, it's a pure momentum strategy. It's by no means "riskless" in the arbitrage sense, however, it is self-fueling for as long as momentum continues. The long volatility ETFs themselves have ironically contributed to the futures volatility collapse because they buy futures on the way up and sell vol futures when volatility is falling, creating a downward vortex. As we see, that vortex also goes in reverse when volatility spikes. The mild -2.5% August S&P sell-off led to a 10x increase in ETF volume as the ETF rebalanced in real-time by buying more contracts.

Fast forward from August, and short positions have increased, as indicated via record short volatility net specs (not shown) and the VVIX (top pane). Now a 5 or 10% sell-off would drive 20x or 30x volume just from the long ETFs rebalancing. Add in the short volatility ETFs being forced to unwind, and then there are the volatility futures speculators themselves. All of this vol unwind of course arbitraged directly to S&P futures.

Rinse and repeat and S&P futures open limit down over and over again. No human intervention required. 

I hope they enjoyed the melt-up