On October 14 we outlined that VVIX was not buying the VIX “chill” and suggested:
“….but watch this closely. It has led to small hiccups before…”
The hiccup proved to be rather “brutal”.
VVIX gave us the “signal” pre the first Corona collapse, and it gave the second “signal” going into this move lower, but Corona is nothing new…
VVIX has continued higher, but chasing protection here looks very late.
CDC notes that infections among younger people quickly spread up the age chain, and the consequences are clear in the hospitalization data.
Social distancing, masks and handwashing could not have produced that flat-line
Daily change in number of COVID-19 new cases in Europe, US and China smoothed by HP filter
Number of new cases per day. HP filter uses lambda of 50. Last obs. is 26th Oct 2020.
We just got off the phone with “our VIX guy”. He has not called us lately as he had “no great big ideas”, so here is his latest logic (frequent readers of TME know the VIX guy continues holding a 100% hit ratio, the inverse way, when it comes to VIX);
His base case according to himself has changed dramatically. The recent Trump momentum, the second/third wave virus explosion, the new lockdowns etc are according to him all new information and together with the elections coming up he sees VIX going much higher (even sent us a VIX chart with some wedge break out).
What makes his input interesting is that it reminds us a lot about the current aggregate psychology. People were busy betting on lower VIX (big put buying in VIX lately) way too early. The above points are nothing really new occurring. Second wave has been known for months, new lockdowns have been in the pipe for long, Trump making a come back as well as the elections taking place…
As usual people hedge at wrong times and wrong levels and most tend to confuse direction with pace. Sure, there is a lot of uncertainty ahead, but how much are people paying for that premium?
People are currently paying around 36% implied vol for DAX November atm options, basically pricing 2.3% daily moves for the coming month as of writing.
Hedge premiums have exploded higher over past sessions, but do you buy insurance before your house started burning or after?
Following are a few charts in separate posts worth considering. For the ones been waiting to sell elections fear, these levels are much more attractive than what so many investment banks were recommending only a week ago…
Eurostoxx 2023 div futs are back to early April levels, yes you read right, April. During the March crisis it was French banks that puked dividend futures as those risks blew up in their structured products books, but as TME has been pointing out for months, European divvy futs have been trading horribly for months.
1. Positioning had turned more risk-on amid pre-election and second-wave jitters.
2. Retail bought the September dip, along with MFs and HFs putting cash to work.
3. Rising ‘blue wave’ expectations and vaccine hopes have recently driven up some reflation trades like US yields, commodities and Value (Banks). Higher levels could thus be more vulnerable to any disappointment on these fronts.
4. Cyclicals are well owned, yet bonds and Growth stocks are also crowded, while Europe has seen outflows recently and EM keeps…
Goldman: “Overall, with yields low and risk assets having broadly recovered, additional QE in most DM economies should result in only modest improvements in financial conditions”
Chart: Summary of DM Central Bank Sovereign QE