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A Recipe For The Mother Of All Short Squeezes?

Tyler Durden's picture




 

Positioning across the world's most-levered financial instruments has never been this extreme.

There has never been a bigger net long VIX futures position.

 

As My401k's Dana Lyons notes, however,

The behavior of the COT positioning in VIX futures has completely changed in recent years. This is no doubt due to the proliferation and increasing popularity of volatility ETF’s, which access the futures market, either directly or indirectly. A simple glance at the chart will tell you that the volatile post-2012 period bears very little resemblance to the 2004-2011 regime.

 

The rise in demand for volatility ETF products has necessitated the increased liquidity in the VIX futures. Therefore, we are now seeing extremes in COT positions that are much greater, even multiples, of those seen prior to 2012. Thus, what was once considered extreme is now pedestrian. Now, the current Speculator net long position is still a record, even compared to readings in the post-2012 world. Therefore, we’re not going as far as to say this reading is irrelevant. We think it is relevant and, on the margin, a bearish data point for the VIX and a bullish data point for stocks.

 

What we are saying is that, in this new derivative-based ETF regime, we still don’t know exactly what the related metrics are capable of. While the current COT reading is a record, it could still get record-er…and by a lot. Consider the extreme positions we’ve pointed out over the past year in Crude Oil futures, Dollar futures, etc., that have gone well beyond prior “normal” bounds. Or simply look at the Speculator net short position in this VIX contract starting in 2012. After a pretty reliable floor in the -20,000 range for nearly a decade, the Speculator net short position exploded in 2012, nearly moving 100,000 contracts beyond that level by 2013.

 

We just don’t know how this dynamic is ultimately going to play out – and I don’t think we will for many years.

But piling on, we also see the Put/Call Ratio is at a serious extreme as well, the highest since 2007.

 

And while the aggregate positioning in US equity futures is extremely short the chart below suggests that sometimes the crowd is right.

 

So while it would appear the world is positioned bearishly extreme in stocks; bonds appear no better.  As shown below, the shorter-dated bond net positioning is its shortest since 2007/08 - and we know what happened next.

 

And there has never been a larger short position in the Ultra Long Bond Contract.

Charts: Bloomberg

Given the weight of all these extremes (and the implicit leverage from the ETF markets), this week's FOMC decision may be more turmoil-er than normal by an order of magnitude.

With such extreme positioning across the equity, vol, and bond complex, it would seem no matter what The Fed does in September, there will be blood.

 

 

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Sat, 09/12/2015 - 16:17 | 6540136 order66
order66's picture

The Fed will drink your milkshake.

Sat, 09/12/2015 - 17:34 | 6540291 Carpenter1
Carpenter1's picture

Worked out pretty well for those folks in 2007......

Sat, 09/12/2015 - 19:32 | 6540574 tictawk
tictawk's picture

@ Order66    You ASS U ME that the Fed is in control.  Clearly if they do not raise, and the market tanks, it would mean the Fed has lost control.  And consider this, interest rates are already at zero, they can't go lower and any move to QE4 will panic the markets because it means that QE 1, 2, & 3 FAILED so what makes anyone think that QE4 will finally work in reviving a moribund debt laden economy? Three strikes and you're out!!!

Sat, 09/12/2015 - 16:20 | 6540143 q99x2
q99x2's picture

Fuckin Aye BTFD. It will be like Christmas in September this year. FAS it consistantly goes through splits 3 or 4 times per year.

Sat, 09/12/2015 - 16:29 | 6540162 neidermeyer
neidermeyer's picture

FED Whipsaw coming right at your neck... Doesn't matter if it starts with deflation or inflation .. it'll wipe out all parties/counterparties and nobody will collect.

Sat, 09/12/2015 - 17:43 | 6540306 Fish Gone Bad
Fish Gone Bad's picture

This will be the first epic disaster everyone saw coming and still did not get out of the way.

Sat, 09/12/2015 - 19:44 | 6540592 weburke
weburke's picture

add missing the start of ww3 to that track record.
I would call this new war ..... Sandstorm
Too late to place your bets.

Sat, 09/12/2015 - 16:49 | 6540210 I AM SULLY
I AM SULLY's picture

If you're like me, you too would like to know how to make between 70 and 100 thousand dollars while living in your mom's basement and eating cheetos and getting bed sores and dying slowly from scurvy ...

https://www.youtube.com/watch?v=xn5z0eWy_Z4

Sat, 09/12/2015 - 16:50 | 6540212 Ban KKiller
Ban KKiller's picture

Risk, value, accounting. Three dead words. 

Paging Winston Smith. 

Sat, 09/12/2015 - 16:58 | 6540229 Tegrat
Tegrat's picture

I bought that vix dip. I know that shemitah is possible, but I also know that manipluation reigns supreme. I bet on red this time.

Sat, 09/12/2015 - 17:00 | 6540232 jonytk
jonytk's picture

TL,DR: Expect extreme volatility !

Sat, 09/12/2015 - 17:23 | 6540270 Physicist
Physicist's picture

The VIX is like the wind, and as the hurricane approaches, the palm tree says to the coconuts, "This is not gonna be an ordinary blow."

Sat, 09/12/2015 - 17:24 | 6540271 ebworthen
ebworthen's picture

So the casino is going to burn to the ground into an ashen heap?  Hope so.

Sat, 09/12/2015 - 18:05 | 6540357 Yen Cross
Yen Cross's picture

  What a stupid article. The author is obviously stuck in a UST short trade.

 rule #1, in trading: The market's insanity will almost always outlast your available trading margin.

Sat, 09/12/2015 - 18:33 | 6540415 Tyler Durden
Tyler Durden's picture

Perhaps reread the article as it was completely lost on you.

Sat, 09/12/2015 - 19:22 | 6540546 Yen Cross
Yen Cross's picture

 I read the article 3 times before I commented.

 The first half of the article alludes to the fact that long VOL trades are "quite possibly" going to blow -up.

 As the article continues, the author becomes more articulate in his/her synopsis of past events, relative to how extreme trades can become, before a new trend is defined.

 Perhaps I was a bit too extreme in my assessment Tyler.

 Personally, I think it's safe to assume that the U.S.S. Debt`tanic has sailed into uncharted waters, with markets priced to fantasy, and zero price discovery in the bond markets as well.

 I deeply appreciate the fact that you took the time to respond to my post, and deeply respect the collective of contributers to Zero Hedge.

Sat, 09/12/2015 - 20:15 | 6540689 tankster
tankster's picture

Suck up much???

Sat, 09/12/2015 - 20:50 | 6540760 Yen Cross
Yen Cross's picture

   lol. Have you been lost in space for the last 4 years?

 I don't recall you offering any input recently?   Armchair, Zero/Hedging?

 Worried about that .gov pension?

Sat, 09/12/2015 - 19:41 | 6540594 Omega_Man
Omega_Man's picture

yen cross is a troll

Sat, 09/12/2015 - 18:53 | 6540473 ebworthen
ebworthen's picture

Yo Yen Cross - it is a little confuzzling with some of the things thrown about.

The entire market is a huge stack of wood soaked in kerosene, and the FED is holding a match.

They might put the match out instead of throw it on the stack, but lots of people are holding matches!

Remember that scene from "The Great Waldo Pepper" where Robert Redford's character has to beat his friend in the head with a piece of wood because he's stuck in his wrecked plane with gas leaking all over him?  A bunch of dopes come running up with cigars and cigarettes and Waldo Pepper is trying to keep them back but someone drops a cigarette.  Foof!

Plane starts to go up in flames and his friend pleads with him "Don't let me burn!  Oh God!  Just don't let me burn!"

Whack!  Whack!  Whack!

Sat, 09/12/2015 - 19:55 | 6540636 Yen Cross
Yen Cross's picture

 Nice analogy.

 

Sat, 09/12/2015 - 19:24 | 6540554 Spiritof42
Spiritof42's picture

I'm thinking about the unsuspecting public who have no idea of the turmoil in the financial markets. They have no defenses.

Sat, 09/12/2015 - 19:43 | 6540597 Omega_Man
Omega_Man's picture

where are the 60,000 $ per ounce gold articles... I need a fix...

Sat, 09/12/2015 - 21:59 | 6540938 delacroix
delacroix's picture

imagine the disappointment, if it only goes to 30,000

Sun, 09/13/2015 - 01:06 | 6541306 jcdenton
jcdenton's picture

I guess that would mean Holter and Sinclair are off by about 3500 tonnes at Fort Knox, West Point, and the NY Fed basements .. (or is it the Chicago branch now?)

 

But then again, they completely miss the 2000 tonnes, somewhere offshore, owned by former underwriter of Aneko; Singapore ..

So for all Holter's and Sinclair's acumen in PM, they're not completely in the loop are they? Then again, I asked Wayne Jett personally on the air, just how familiar was he with Holter. He said not much. And Jett is a pretty sharp guy. A lawyer by trade. A self-described classical economist by self training ..

https://app.box.com/s/hfgvcqg7gqh7i27at6sv53ywu87lwarp

Sat, 09/12/2015 - 19:55 | 6540633 Chuck Knoblauch
Chuck Knoblauch's picture

Bear traps ahead.

Sat, 09/12/2015 - 22:48 | 6541061 Tyrone Shoelaces
Tyrone Shoelaces's picture

If my VXX OCT 30 CALL don't pay off, Imma be pissed, just so you know.

Sun, 09/13/2015 - 01:09 | 6541312 bored george
Sun, 09/13/2015 - 08:13 | 6541693 lucky and good
lucky and good's picture

The world might soon witness a major shift in the value of one investment over another as investor seek firmer ground. Derivatives, currencies, plunging stock prices, air rushing out of a bond market bubble, how debts are structured, and the timing or direction from which problems arise are all elements that must be considered. Several factors determine just how much influence can be applied to how current economic policies unfold.

Using the metaphor of "let the chips fall where they may," things like the size of the chips, the rate or speed at which they fall, and the number of chips in the air may make them uncontrollable. We could find ourselves up to our neck in chips in a blink of an eye, at that time all bets are off as to how successful efforts to stem a catastrophe might be. The financial overlords may be losing control and this means during the final stage of the global shakedown events will be chaotic and become very wild. More below on how violent the crash might be.

 http://brucewilds.blogspot.com/2015/08/the-final-shakedown-will-be-uncontrolled.html

Sun, 09/13/2015 - 11:29 | 6542070 all-priced-in
all-priced-in's picture

So the stock and bond markets could possible move higher or go lower -

 

They could go higher then lower - or go lower and then move higher -

 

The moves could be small or they could be large -

 

Great article I feel better educated after reading it.

 

/s/

 

 

 

 

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