Volmageddon. Please Buckle Up. The Plane Will Be Landing Soon
Stocks are vulnerable to a 5% 'air-pocket drawdown' as greedy traders short volatility.
Tuesday's stock-market pullback on February, 13 after a hot inflation report actually showed us something else about the market.
It turns out that it did… an overcrowded short side of the options market which was reminiscent of the 2018 and 2020 'Volmageddon' events.
ProShares Short VIX Short-Term Futures ETF
SVXY
graph says selling volatility is on the hot spot, like four and six years ago, in 2020 and 2018 respectively.
The "Volmageddon" episode happened six years ago after traders piled into a bunch of ETFs that were designed to return the inverse of market volatility (essentially betting on a calm market). And when volatility went up in February 2018 and in February 2020, it tanked those strategies, sending the S&P 500 down more than 10% in two weeks.
Investors appear to be taking risky bets again, specifically in VIX futures, which are assets that let investors bet on future volatility. As VIX futures expire, the S&P 500 is seeing stronger price reactions.
Based on the magnitude of the move in VIX futures, there is an increasing threat that the rising level of greed in the 'short-volatility' trade, similar to what we saw in 2018 and in 2020, could result in an air-pocket drawdown of 5% or more in the S&P 500, to 4800 points respectively.
The short-volatility trade became very popular strategy after 2010 when volatility was low, and traders could make money betting against market turbulence.
The Cboe Volatility Index, which is also dubbed as the
VIX
or the market's "fear gauge," is sitting around 14, near historical lows.
The rebound in interest in short-volatility strategies is once again posing a risk to the broader markets here as a negative catalyst can clearly spark a momentous, derivatives-driven selloff in the broader stock market like that which we saw in 2018 and in 2020.
It's not a major concern right away as volatility upticks have been small, and the S&P 500 has remained resilient. The market shrugged off Tuesday's pullback quite fast.
But it's worth keeping all your eyes on as all 2024 progress can be erased shortly.
Going forward, these expirations will remain dates to keep in mind as the threat of volatility will be elevated as we move further into 2024.
Technical graph for
SPX
says we are still in the upside channel since Q4'22, near its upper line, with further perspective opportunities to erase 2024 gain, shrugging back to mid-line around 4800 points.
Market breadth says also there're huge divergence in
SPX
and in
NDX
all the 2024, as 50-days indicators move firmly down all the year, while indices are still up so far.
Tuesday's stock-market pullback on February, 13 after a hot inflation report actually showed us something else about the market.
It turns out that it did… an overcrowded short side of the options market which was reminiscent of the 2018 and 2020 'Volmageddon' events.
ProShares Short VIX Short-Term Futures ETF
SVXY
graph says selling volatility is on the hot spot, like four and six years ago, in 2020 and 2018 respectively.
The "Volmageddon" episode happened six years ago after traders piled into a bunch of ETFs that were designed to return the inverse of market volatility (essentially betting on a calm market). And when volatility went up in February 2018 and in February 2020, it tanked those strategies, sending the S&P 500 down more than 10% in two weeks.
Investors appear to be taking risky bets again, specifically in VIX futures, which are assets that let investors bet on future volatility. As VIX futures expire, the S&P 500 is seeing stronger price reactions.
Based on the magnitude of the move in VIX futures, there is an increasing threat that the rising level of greed in the 'short-volatility' trade, similar to what we saw in 2018 and in 2020, could result in an air-pocket drawdown of 5% or more in the S&P 500, to 4800 points respectively.
The short-volatility trade became very popular strategy after 2010 when volatility was low, and traders could make money betting against market turbulence.
The Cboe Volatility Index, which is also dubbed as the
VIX
or the market's "fear gauge," is sitting around 14, near historical lows. The rebound in interest in short-volatility strategies is once again posing a risk to the broader markets here as a negative catalyst can clearly spark a momentous, derivatives-driven selloff in the broader stock market like that which we saw in 2018 and in 2020.
It's not a major concern right away as volatility upticks have been small, and the S&P 500 has remained resilient. The market shrugged off Tuesday's pullback quite fast.
But it's worth keeping all your eyes on as all 2024 progress can be erased shortly.
Going forward, these expirations will remain dates to keep in mind as the threat of volatility will be elevated as we move further into 2024.
Technical graph for
SPX
says we are still in the upside channel since Q4'22, near its upper line, with further perspective opportunities to erase 2024 gain, shrugging back to mid-line around 4800 points. Market breadth says also there're huge divergence in
SPX
and in
NDX
all the 2024, as 50-days indicators move firmly down all the year, while indices are still up so far.
Trade active:
Apr 19, 2024
👉 Unfavorable macro conditions, geopolitical tensions and collapse of rate cut hopes give no chance for bubbles.
👉 VIX Short Volatility ETF (SVXY) still is under BIG PRESSURE.
👉 Unfavorable macro conditions, geopolitical tensions and collapse of rate cut hopes give no chance for bubbles.
👉 VIX Short Volatility ETF (SVXY) still is under BIG PRESSURE.
