Tuesday, February 6, 2018

"ONE OF THE GREATEST SQUEEZES OF ALL TIME?"

From The Macro Tourist:
It seems like just yesterday the overly confident bulls were openly taunting any market participant that dared counsel about the increasing risks in the equity market.
“You don’t get it. Trump’s tax policies have ushered in a new era of corporate profitability. Why fight the rise? Nothing can stop this freight train.”

Yadayadayada. It’s always the same. Markets make opinions, not the other way round.
All of sudden, in less than a week, the S&P 500 has given up 200 points.
But what happened? Why the change of heart?

Well, as much as I would like to point to a specific economic release, or some other geopolitical development, the truth of the matter is that there really was no catalyst. Equities were simply up on a stick, with everyone chasing the ever-rising market. It was made worse by the new era of electronic trading that favours VWAP or TWAP type orders that spread the buying out over the course of the day resulting in a relentless drip higher. This had the effect of tricking market participants into believing that volatility had permanently disappeared. And in today’s low alpha world, too many investors leaned on the short equity volatility trade to pick up yield.

I have written about this risk extensively. The Source of the Next Crisis or Vol Sellers Branch Out are just a couple of the articles warning about the risks from selling volatility.

Last night, short equity vol sellers got a lesson in getting squeezed. And as much as everyone wants to enter into these complicated discussions about kurtosis or the volatility of volatility, I am going to spell it out in much simpler terms. The short vol sellers were out over their skis, and the market always punishes the weak hands.
In the space of 20 minutes, VIX futures spiked to a level that was higher than 80% from the previous close, triggering the dreaded liquidation clause in the short XIV ETN. And sure enough, it appears the manager chose to exercise that right, with the market assuming the ETN will be wound down....MUCH MORE