Friday, February 16, 2018

Why The Casino Is About To Explode

You don't have to be a genius to figure out how this all ends, you just have to be able to fog a mirror. Somehow after last week's debacle, the burden of truth is still on us bears. Testament to how stoned this society has become - they can ignore daily school mass shootings, so they can ignore anything at this point. I'm looking forward to taking a break from explaining the obvious. This has turned into human history's biggest fucking gong show...

Last week saw the first 90% down days in 17 months. What is coming next are 100% down days. Contrary to popular belief, history's largest one day volatility spike was not a "one time event"...

No sound required:

Last week's largest ever one day spike in the VIX should have been a warning call to bulltards. But instead they took the opportunity to once again buy the dip with both hands. It's not hard to understand why volatility exploded. There's no place left to hide...

Contrary to popular belief, the VIX didn't explode because the short volatility trade was unwinding - it's the exact other way around. The Short vol trade was force unwound because the VIX exploded. There is no way to directly trade the VIX, it's a mathematically calculated index, not a tradable asset. The VIX is derived from the implied volatility of the front-month S&P 500 options. The reason why front-month option volatility exploded last week is because of the 90% down days in the S&P 500. Meaning that 90% of stocks were down at the same time:

February 2nd, 5th, and 8th were all 90% down days:

But it gets far worse, because the low volatility of the past two years has engendered mass complacency and a lack of hedging. Which has made the VIX extremely sensitive to small changes in the S&P 500. Which is why second derivative volatility had its largest spike ever last week:

But, it gets worse still. The back up in bond yields has literally crushed the end-of-cycle recession trade: Utilities and Consumer Staples. So these sectors are already ripe for decline. They are no longer "safe havens":

So putting it all together, and what gamblers face is a fragmented casino, underhedged gamblers, extreme leverage/risk exposure, record low liquidity, concentration in a handful of stocks, and extreme VIX beta relative to the S&P 500:

Recipe for explosion

There IS actually one place to hide, back in bonds, which are now record shorted. Meaning the stampede out of stocks into bonds will be epic.

No, they don't see it coming:

Large cap internet stocks lost a month of gains last week and regained them this week. In other words, January was the melt-up and this week was the turbo melt-up:

Unfortunately, this rally is not of the same high quality as the one that fell apart last week:

The reflation trade mounted a partial comeback deja vu of last February:

Gamblers would do well to brush up on their technical chart analysis. Because the three wave overlapping retracement is one of the most reliable signals that a rally is game over, man:

Know what I mean?