Credit Slumps But VIX Dump Drives Equity Pump

Tyler Durden's picture

Echo. In a slightly less aggressive replay of last Sunday/Monday's reaction to news from Europe, equity futures (and FX markets) opened gap-up and faded significantly to end modestly green after touching the 50DMA briefly. A 20pt drop from its open last night in S&P 500 e-mini futures on the less-than-Armageddon-but-more-of-the-same-disaster scenario played out, which then retraced around 50% of its drop during the day session. Equities diverged strongly from a notably decompressing IG and HY credit market (and significant weakness in HYG - the high-yield bond ETF). Treasuries and FX markets also remain disconnected (implying weaker levels in US stocks) as broadly speaking risk-assets did not feel the same love as stocks today. It would appear that, given the heavy volatility action, drop in Short-term vol (VIX), and recent divergence from stocks, that there was heavy vol selling today which supported a higher equity market in a virtuous manner until later in the afternoon when VIX and SPX had recoupled and stocks then limped lower to VWAP. Treasuries ended the day relatively unchanged from Friday's close after opening 6bps higher in yield, rallying 10bps from there as equities and FX plunged, and recovering higher in yield as the US day session progressed. EURUSD held under 1.26, diverging lower from equity strength from just before the US open leaving the USD higher by 0.45% from Friday's close - even as AUD strengthened notably. Commodities generally ignored USD strength with Copper, Gold, and Silver practically unch from Friday's close while WTI dropped over 1% to around $83 by the close. Financials underperformed as a sector (as Tech and Discretionary gained) but the majors were the worst hit having given up all their gains from Friday's MS lost 3.4%, Citi -2.6% and BofA & GS -2% with JPM close behind.

VIX had 'decoupled' more bearishly (higher) from equity markets last week (just like credit) but it seemed today gave the opportunity to bring the two markets back together as VIX compressed dramatically back into line with stocks by the middle of the afternoon - once that 'technical had lifted, stocks leaked back off their day-session highs to close near VWAP (only to see an after-hours pop back up to the highs

VIX saw its biggest drop in over 2 months (and 2nd biggest drop in eight months), ending below its 50DMA for the first time in over 5 weeks. We do not that the lat two times we have seen a drop of this magnitude, the following day saw a 14% and 22% jump in the short-term vol measure)...

but credit was telling a very different tale today as HY and IG were notably worse on the day (dark and light red) and despite a late-day save in HYG (green), even the high-beta driver lost decent ground early on though the afterhours ramp to highs in ES (blue) was 'interesting'...

ES was noisy but basically tested above Last Monday's opening highs at its open, faded to test Friday's lows, after falling off a cliff as it passed Friday's close. Once the day session had started (orange oval) ES remained between Friday highs and VWAP finishing up at a low volume node (an area that had not been tested much during the day - red arrow)...

led by energy and financial weakness as the major TBTFs gave up all their Friday gains...

Across broad risk assets, correlation broke down notably this afternoon (lower right chart) - after being relatively high in the European session. Between HYG and VXX softness, SPY was dragged lower in the late afternoon (upper left chart) but recoupled by the close as HYG regained its footing. CONTEXT (a proxy for broad risk assets) diverged weakly from equity's strength from the middle of the European session (upper right chart) but VIX was rather notably decoupling lower (lower left chart) from its longer-term fair-value with credit and equity markets as it saw one of its largest single-day drops in months...

ES volume was below average and average trade size remains on a downward trend. Stocks remain unsupported by FX, credit, and Treasury markets.

Any VIX technical is lifted now after today's convergence and ES tested and failed at its 50DMA today. For now we are less systemically trading but with the financials lagging rather notably today, we wonder just how high the conviction of a Bernanke-save later in the week really is.

Charts: Bloomberg and Capital Context

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Mr. Fix's picture

Nobody seems to believe any "news" any more.

bdc63's picture

Everybody is just waiting for The Bernak to speak WED.

All the pundits seem to think we'll get a QE announcement.  Not me.   I think we'll get one of those "we stand ready to act should conditions change" statements, but I just can't see the FED blowing their wad right now.  Heck, the DOW isn't that far from all time highs ... and we all know the ONLY reason The Bernank prints is to prop up the stock market.

Maybe the FED never has to print again ... it appears they can keep the levitation illusion going just by stating that they will act if needed.  Really quite brilliant, in an evil satanic sort of way ...

Mr. Fix's picture

I think he's been proping the DOW up for years now.

He's just to modest to take credit for it.


flacon's picture


"The last duty of a central banker is to tell the public the truth." ~  Federal Reserve Vice Chairman Alan Blinder

I know, you're probably thinking Alan Blinder is a look-alike for the guy from Heaven's Gate:


Oh, and we can add Alan Blinder to the long list of bald bankers. 


Manthong's picture

Well he said that part of the “policy” is to improve “communications”.

It has to a cover for something. This is all too surreal… they just have to be pulling other strings behind the scenes to explain this defiance of gravity and everything rational.

BlueStreet's picture

A fed move in July would make more sense with a downward move in the S&P to around 1200 in the interim.  That downward move would both push them to move and give them more bang for the buck.  

junkyardjack's picture

I still have the feeling that they need to wait for Europe to fail first.  QE3 will be the thing that keeps the market from complete panic.  If they do it too early and then Europe blows after then they have a problem.  Or they could do it as a global coordinated event with Europe but without EU it doesn't have the same kick.  QE needs to be combined with the hope that it will make things better or it will be immediately faded

bdc63's picture

"I still have the feeling that they need to wait for Europe to fail first"

In the words of the great (?) Dave Hester: YUUUP!

I fear that they are going to try to go to congress for another TARP as well.  They really will have to declare martial law if they do that.  People were really pissed last time -- can't even imagine what it might be like this time.

Hohum's picture


You may be right.  However, WTI has been hammered down enough that BB may shoot another one out.

battle axe's picture

It is going to be a circle jerk, until Euro gets fixed/blows apart, and Iran/Israel situation gets resolved (air strike). 

bdc63's picture

... you think the Iran/Israel situation is going to get "resolved" by an air strike?  really?  from where I sit you don't need to have a very active imagination to see an "air strike" spiraling into WWIII.

battle axe's picture

An Airstrike is going to happen, and yes it will be bad, but for the market, it will take one more uncertainty off the table. Markets hate the unknown. This is about finance not morality....

Turin Turambar's picture

I love how the VIX was down.  Nothing to fear in this market. LOL

Major money players positioning to clean up for pennies on the dollar when they decide to let things collapse imo.

Cdad's picture

"Mark it zero!"

Another completely treacherous day of FUBAR trading.  Of course, Greece was meaningless, as were the rising yields in Italy and Spain because, as Tyler has steadfastly been reminding everyone, the only thing that matters is more US dollar treason from Ben Bernanke.  Great.  Nice investable thesis once again.  I can't wait for the FED's next announcement so that I can "invest."  What a joke.

"One day this war is gonna end..."

Village Smithy's picture

While I bear no love for Bernanke and the den of thieves he represents, I am not as sure he will announce a printfest on Wed. The "if" of Europe blowing up has changed to when and how. I can't see him commiting assets at this point when the nature of the disaster they will be used against is still so shrouded in manipulation. Due to his manipulation even Europe fixing itself would be a disaster in that the Treasury bubble would pop. I agree, what a joke.

you enjoy myself's picture

i'd agree largely because Ben likely views preservation of the Fed's "independence" as his biggest concern now.   he's already explicitly told Congresss that fiscal policy is going to have to carry the load from now on, that the limits of monetary policy are fast approaching.  if he pulls a QE now, when SPX is at freaking 1344, it'll be seen as gratuitous and well outside of the Fed's chartered purpose - it will result, rightfully, in Republican (and probably some Dem) outrage.   there will be a huge push to audit the Fed, to exert more control over its balance sheet and decision making, etc.   there's no way he fires his last bullet this early.

Village Smithy's picture

One thing that doesn't fit my thesis is why, if he isn't going to print, has he let all of his governers talk about it. They have ramped up expectations and there will be quite a downdraft if they are not met. 

Village Smithy's picture

Pure ZIRP and PPT at work day after day. Just don't short anything and they will have to use their own money to ramp.

you enjoy myself's picture

great, we're back to the 2010/2011/2012 pattern of huge ramps ahead of expected good news (in this case that Syriza would win, causing ECB to print like mad) and then when that good news doesn't materialize....we just hold steady at the inflated baseline.    serious question - why is shorting still legal if you're defacto not allowed to short? 

Village Smithy's picture

Banning it would cause the sheeple to ask questions. This way the algos do all the dirty work for the POTUS.

RobotTrader's picture

Every single bear market the last 15 years has been kicked off by relative weakness in retail stocks and utility stocks.


Right now, utilities and retail are very strong.

New 3-year highs on utilities today:

Many strong retail names also starting to move out to new highs, like Petsmart.

NYSE Summation Index is now in a confirmed uptrend.

Village Smithy's picture

It's all ZIRP my friend. When money is being jammed into the market it has to go somewhere. The sad part is that the money is being stolen from the unborn.

wagthetails's picture

I think this analysis works for normal economic cycles.  strong retail and utlities won't be enough to offset a possible collapse of major currency. 

earleflorida's picture

yeah, and they get their numbers bi-weekly on monday and friday late afternoon via the pro-bono ussa strafford edifice dept.,... aka, ministry of propaganda [MoP] 

junkyardjack's picture

Isn't it equities rally drives vix dump?  Slow motion face rip in effect...

km4's picture

G20 summit: Barroso blames eurozone crisis on US banks | World news | The Guardian

The opening day of the G20 summit was threatening to deteriorate into a fractious row between eurozone countries and other non-European members of the G20, notably the US, as EU commission president José Manuel Barroso insisted the origins of the eurozone crisis lay in the unorthodox policies of American capitalism.


LongSoupLine's picture

I love fancy charts and analysis on what is simply a crooked piece of stinking horseshit disguised as a "market". Give me a fucking break...

BandGap's picture

Given the corruption of the market, is the only reason we view these trendlines is to note the corruption of the market?

This reminds me of a guy at work one, who always promised big things and then helds off his mangement time and again with the same charts and graphs and general BS that got him into his position. Eventually he was fired.... 

Sockeye's picture

Hey, you talking about me?

automato's picture

Why is it that no one is mentioning the 2-8% EXPLOSION in Gold/Silver stocks?

Village Smithy's picture

Because by tomorrow it could be a 2-8% implosion.

localpacific's picture

Yes well thats a good point but its also important to look at the Technical Signals

RobotTrader's picture

Is King World News still predicting the End of the World?


Just checking.

Some pretty amazing headlines the last few weeks, I figured we would all be crawling out from 911 dust by now after a Wall St. meltdown.

Snakeeyes's picture

Wierd day. Homebuilding companies were all up by about 4% when Wells Fargo announced the homebuiilder index still sucks (below 50) but was up a one point.

Another cheap money rally. Barclays thinks the Fed will buy Agency MBS to the tune of 1/2 of QE1.

Bubbles Bernanke!


slewie the pi-rat's picture

the checks only hafta go out once per month

robo_T tossed out that VIX thingy earlier

Treasuries were almost like they had been shorted and were getting covered

but the whole day and since things turned red 2  AM my time in asia/europa things have seemed "painted"

but even tho the painting was great, everything seemed to have settled but the EUR/USD appears to me to have a ways to go.  down

and stocks will go saggy baggy

we could get a real nice risk off tomorrow and wednesday as the goldilocksCrisisTM is sculpted and fed thru the MSM

and we can always hope they blow the whole fuking world economy to smithereens for our entertainment but the checks look ok to me here but for july?  i'm getting goldilocks may be confused...   L0L!!!

RationalPrepper's picture

In my trading account I'm generally long hard assets (metals, miners, ag, etc.) with hedges in the form of VXX calls and XLF puts.  Today VIX/VXX was literally VIX petroleum jelly for me...only it didn't even help the pain.  Oh well.  I just close the account, put half in cash under my mattress, and half in physical PMs in an undisclosed location. 

upb's picture

the VIX is in IMO!!!  VIX got clobbered today and on Friday.