A Major Warning From Tom McClellan : "Can This Possibly End Well?"

Tyler Durden's picture

In one of his tweets yesterday, Tom McClellan, whose parents created the famous McClellan Oscillator and Summation index used by thousands of traders everywhere as a market timing tool, pointed out something disturbing: the number of shares outstanding of the VXX, the VIX tracking ETN, has soared exponentialy in recent weeks.


* * *

As McClellan cautions: "VIX futures ETF extremely popular now. Can this possibly end well?"

So what does this mean: is the surge of investor interest into VXX a contrary indicator and suggesting that the rally will continue? Not quite - as McClellan adds this is a "double-contrary indicator" and references the following explanation given in mid-February when the market had bottomed and when the number of VXX shares outstanding had tumbled.

Here is McClellan's explanation from February 18 why "VXX Shares Outstanding Data Work Differently."

One of the more popular new market sentiment tools among technical analysts is to look at the changes in the number of shares outstanding in various ETFs and ETNs.  As traders get more bullish or bearish, they move into or out of these instruments, and that shows up as changes to the numbers of shares outstanding. 

Normally, a high number of shares outstanding shows intense investor interest, and thus a topping condition for prices of that ETF and its associated market index.  Similarly, low levels mean nobody likes that ETF, and thus it is likely a bottom for that ETF’s price and thus for the market.

But this principle works differently in VIX-related ETNs like VXX and XIV.  VXX is designed to track the VIX positively by owning VIX futures, although it has big problems over time with slippage due to the roll from one futures contract to the next.  XIV is an inverse-VIX ETN, again by using VIX futures, so its share price goes up as VIX futures fall (or down as the VIX rises).

If VXX worked like other ETFs, then as the SP500 falls and the VIX rises, more investors would chase after it and drive up the total number of shares outstanding in VXX.  But instead we see the opposite behavior in the chart above.  Right now, VXX shares outstanding are at one of the lowest readings of the past couple of years [ZH: this was written on February 18], and such low readings are reliably associated with meaningful price bottoms for the SP500.  So rather than seeing the “hot money” piling into VXX as the VIX rises, its shares outstanding data acts more like a depiction of the “smart money”.


By the same token, XIV’s share price has fallen in 2016 as the VIX has risen, and investors have responded by pouring more money into XIV and thus driving up is number of shares outstanding:

I do not have an explanation for precisely why these ETNs work differently in how their shares outstanding data behave versus the behavior of SPY or QQQ shares outstanding.  But even if we cannot explain a phenomenon, that should not stop us from noticing that it does work differently.  And when we see it working reliably for long enough, the quest for “why” fades in importance.

Users of eSignal and QCharts (Interactive Data Corp.) can track these data under the symbols $VXX.SO and $XIV.SO.  The data on shares outstanding for many other ETFs are also available using the same symbol convention.  Other data vendors may also have it, so check with your own data company.

Right now, both VXX and XIV shares outstanding data are showing us that there should be some more upward movement for the stock market before we get the next downturn toward the April low.

* * *

McClellan wrote the above just over two months ago, when he accurately bottom-ticked the market. He is now out with the opposite warning, and suggesting that the record number of VXX shares outstanding is an indicator that the top, at least according to this technical indicator, is now in and a sharp drop may follow.

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Handful of Dust's picture

How many times have I heard, "This will not end well?"

Mr. Bones's picture

How many times have you seen the end and thought, "That went a lot better than expected"?

1000 splendid suns's picture

Everytime a woman gets behind the wheel?

Thought Processor's picture






They are issuing shares in order to blunt the price escalation on the VIX.  ie: it's manipulated.



Given what we know about the broad scope of market manipulation that has been going on for who knows how long, is this a surprise to anyone?

herkomilchen's picture

Issuing and withdrawing shares is intentional and necessary to keep share value tracking VIX.  That's what traders of the shares want.  It's the whole point of the ETF.  For more info, see here:


John Kich's picture

Obama will not finish his second term! Banned independent documentary reveals the truth. This will scare millions!


johngaltfla's picture

The technical analysis term for these charts is called the "BOHICA Retracement"...Cover your ass accordingly.

John Kich's picture

This is Donald Trump's most shocking statement yet,

However the mainstream media isn't saying a word about it!

What are they really trying to cover up?!


KnuckleDragger-X's picture

At this point everybody is betting on whether there's a live round in the chamber in our little game of market Russian roulette. Then they put the gun in their mouth, and pull the trigger to see if they've 'won'.......

Boris Alatovkrap's picture

This is refer to market activity or chance encounter with cocktail waitress in Bangkok after hours?

knukles's picture

Both require a set of balls. 
Interpret that as you might.

herkomilchen's picture

Every day at market close.

BobbyRay's picture

Uh 2000, 2003, 2008-? ...... those recent dumps did not "went a lot better than expected".

PlayMoney's picture

There is no end. As long as Yeller keeps saying "i'm juuuust about to raise" and thenpulls the football...the suckers and algos send it to DOW 1 trillion 

SelfGov's picture

And it won't.

To those familiar with debt and central banking it is obvious that there is catastrophe waiting in the wings.


To those familiar with thermodynamics, heat capacity and dissipative systems it is obvious that the climate is approaching a change that most humans would consider catastrophic.



XAU XAG's picture

super heat cluster fuck on it's way


Watch out for the super heat HORN that is what will get you

BandGap's picture

Like discharging a capacitor - suddenly and all at once?

So, what is the trigger here? War? China's resurrection of the pseudo gold standard?

Boris Alatovkrap's picture

This is remind Boris of very funny industrial accident when is hand capacitor to co-worker-in-training and is say very specifically, "here, do not touch these end toge… never is mind."

jughead's picture

funnier is taking charged capacitor and tossing it into large urinal as coworkers are pissing.  

Four chan's picture

i prefered switched outlet in darkened room.

Boris Alatovkrap's picture

Better is darkened room with inch deep of Methanol.

rrrr's picture

Please provide some links related to your second paragraph, if practical. Thanks.

Theonewhoknows's picture
Theonewhoknows (not verified) SelfGov Apr 27, 2016 9:08 AM

The important part here is still while knowing how everything is manipulated to make sure you are on the upside. That you with your knowledge make money to be independent and say whatever you want to say while they take savings from the middle-class and make everyone poorer. I think this guy made a good point when he compared different markets according to CAPE and other indicators. On top of that, he pointed to the cycle of capital transfers between developed markets and emerging ones. Worth watching. Especially second half. http://independenttrader.org/trader21-lecture-presented-at-fx-cuffs.html

_ConanTheLibertarian_'s picture

I know what you're thinking. Did they say "this will not end well" 173 times or only 172?

Well, to tell you the truth, in all this excitement I kinda lost track myself.

BandGap's picture

Do you feel lucky? Well, do you? Punk.

CPL's picture

DOW 36000!!!  Bullish!

back to basics's picture

It speaks volumes have fucked the markets have become when an experienced trader/analyst can't explain why the ETF behaves the opposite than what you would expect but only observing that it does.

God save us all if indeed someday this doesn't end well.

Slomotrainwreck's picture

God bless those who have PM's in hand when it ends well. fify

RadioFlyer's picture
RadioFlyer (not verified) back to basics Apr 27, 2016 6:54 PM

Schroedinger's Market, but no one can see inside the box to see if it's dead or alive, so it exists in both states.

Vlad the Inhaler's picture

How many times did oil surprise to the downside and AAPL  missed earnings and they still just kept buying stocks like there was no tomorrow?

garypaul's picture

He bottom-ticked the market a couple of months ago? I could have sworn he was warning of a big breakdown a couple of months ago. Anybody got proof otherwise?

coulous's picture

This time is different

max2205's picture

preeeeeeeeeeeeeeeee int!

TradingIsLifeBrah's picture
TradingIsLifeBrah (not verified) max2205 Apr 27, 2016 8:50 AM

If you are buying a VIX ETF then you deserve to lose all of your money.  I have no sympathy for these idiots

poland spring's picture

If you're buying a VIX ETF, then you are doing it for a specific purpose.  No one ever said this is a long term buy/hold vehicle.

chomu's picture

They are the easily the most contago'd pieces of shit that the street has ever created. I don't have any sypmathy either for e-trade joe's that dont do their homework. Shorting these has been quite profitable. And its been a bitch for my broker to reorg the options every time they split.


Still the ideal way to trade is via the actual CBOE VIX futures through and F&O clearing acct. 

slaughterer's picture

Those extremely high number of shares outstanding of VXX are great for Grandma Bull to squeeze.  

buzzsaw99's picture

hedges are a waste of money.

We don't need her (fundamentals), we have Otho. (Yellen, Kuroda, Draghi}.

[/Delia Deetz, Beetlejuice]

Ghordius's picture

true, but there are exceptions to that rule that are incredibly important

first... leverage. stratospheric leverage of the kind most could not even comprehend can only be achieved with hedges

second... who's money? Other People's Money or the more cautious type, Own Money?

as long as enough people defend hedge funds and defend "the contract as a holy thing denoting freedom, period" this derivative madness will go on...

... until even hedge funds close their doors. which is somewhat happening, or at least looks like it is changing a bit

and now, the real scary story: Goldman Sachs, The Vampire Squid Firmly Attached To The Face Of Humanity... wants your money

yup. GS is now accepting online deposits. Bank With The Squid? I'm talking retail, mind, "Granny's money". The kind that can... vaporize, and No One Get's Killed

venturen's picture

never ends well for regular people...always ends well for the owners! RESCUE THE RICHEST before they start losing money!

buzzsaw99's picture

RESCUE THE RICHEST before they start losing money!

Funny because that's exactly what they'll continue to do.

ThisUsernameFollowsTheRules's picture

Compared to crisis' we've had in the past, this financial crisis might actually go pretty well for people in the United States.

More Ammo's picture

"this financial crisis might actually go pretty well for people in the United States."

When EBT shuts down, "well" will be just a hole in the ground...

Theos's picture

It never ends well for anyone buying VXX.

Pareto's picture

+100 Been burned on this piece of shit - too many times to count.

ParkAveFlasher's picture

Let the smartasses in life all rush to one side of that boat, singing "it's just that simple!", and then see if it stays afloat to save them, or if a big whale sweeps up to gobble them in one mouthful.  If it starts to feel like a herd, then it is.