VIX futures positioning hit another all-time record short just two weeks ago after collapsing to 12-month high levels as "Taper" concerns increased. From the start of July to the 3rd week of August VIX futures were sold in epic proportions providing the fuel to lift a plateaued stock market from taper-anxiety to new all-time highs (as nothing changed). Over 100 million contracts were sold in the 7-week period - a totally unprecedented amount of complacency. However, in the past 3 weeks, there has been an inflection; is this the end of selling, or are we about to pull VIX even lower with a concerted reflexive selling of even more shorts? As SocGen warns, this historic level of non-commercial short positions (read speculative) implies any market correction - or VIX-related spike - would increase short-covering and exaggerate the fall dramatically.
Today's catch-up from Friday's closing hedge-fest...
and ramp into the close has ignited further momentum after hours...
But VIX futures positioning hit an new all-time record low (short) 2 weeks ago...
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As the post-Taper fears-driven hedging was unwound en masse...
...in the biggest 7-week shift in VIX shorts ever...
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and with Implied correlation collapsing to the same level as right before Lehman and right before the US downgrade, it seems complacency over systemic risk is as high as it gets in the new normal...
In the new "Fed driven" normal, the base correlation between stocks is higher than before as the market now 'knows' there is an underlying factor (let's call it liquidity) that moves everything more in the same direction more of the time... ImpCorr's low levels here imply that any systemic risk threat (whereby correlations spike - which tends to accompany a rapid downturn) have been removed.
This can also be interpreted as VIX index selling is dramatically outweighing the selling of volatility in the S&P's component names...
With all that ammo - is it any surprise that stocks surged on algo-driven options market-making volumeless exuberance?
The question of course is - where next? Seems to us that the market just blew its wad on that VIX smash and is ripe for a squeeze?
Bear in mind that the period during which VIX was sold (bullish) also saw breadth in stock markets diverging (new lows outpacing new highs etc.) as stocks rose - was this unwinding hedges and underlying positions? That would explain the lack of volume...