Yesterday was different.
Bond yields tumbled with stocks (they have tended to rise recently as stocks tanked)...
...and VIX spiked as stocks were spanked (it has been decoupling, exuding calmness for a few days until then)...
The change was catalysed by two factors:
1) "Hard-Landing" / "Recession" narrative keeps gaining-steam, so bonds are beginning to "work" as a risk-asset hedge, and
2) Yesterday's VIX-piry (and tomorrow's Op-Ex) removed much of the overhang suppressing vol, crushing hopes for some form of 'stabilization'
So given the 'change', what happens next?
As Charlie McElligott warns, the bond short covering is only just beginning.
Today's ugly Philly Fed miss and significant trend rise in jobless claims is leading to another wave of spastic short-covering / upside-buying in USTs (and USD weakness), as "Growth Scare >> Recession" meme-check builds further steam.
In fact, while unwinds have begun, CTA Trend legacy “Short” positioning remains a significant source of “covering” risk instability
And notably, McElligott points to Credit / Spread-Product / Long Duration demand from “asset allocators” and real money:
"I just get the sense that as the market crystalizes on this (pre-emptive) move towards 'Contraction / Recession / Hard-Landing' that the market is gonna 'come hard' for this stuff."
Shifting back to equity-land, the 'calmest selloff ever' is over following VIX-piration yesterday.
As SpotGamma notes, yesterday's VIX expiration likely pulled forward expiration “rally fuel” but looked for more support around the 4000 level. However, terrible retail reports from the likes of WMT (-15%) & TGT (-20%) and now CSCO (-10% premarket) signal “recession”, and that comes into an environment with increasing interest rates. This likely triggered both natural & forced liquidations. As markets declined it was quite likely that options hedging flows sold, too, as large short dated put positions went from 2% out-of-the-money, to 2% in-the-money.
The concentrated puts positions near 400SPY/4000SPX/300QQQ invoked “jump risk” as options rip higher in value.
Shown below is the price of the 5/20exp 4000 strike put – note how its price shot higher as 9AM VIX settlement passed...
Negative Gamma is dominating the market's intraday moves...
...which are at near record levels of turbulence. As Nomura's McElligott notes, this is the longest extended period of dealer "short gamma" seen for years, which implicitly has led to the most persistently violent intraday-day range period in recent history...
The Nomura strategist offers one more inisght of note, that is that one of the challenges for Stocks now with regards to hopes of some form of stabilization and “finding friends” - at least from within the leveraged community (Equities L/S and M/N space) - is “tight-stops” in this type of VaR environment, where risk-allowances are punitively low due to so many sample days where both longs- and shorts- are consistently blowing through of risk-limits.
Still room for more pain as traders are still not 'grabbing for crash-hedges', and tomorrow's OpEx has huge levels of Delta and Gamma set to come off:
SPX / SPY will see 35% of the total $Gamma expire Friday ($16.7B of $48.3B), with -$74.5B (!!!) of associated front-week (Short) $Delta set to come-off
QQQ will see 41% of the total $Gamma expire Friday ($1.15B of the $2.8B), with -$9.6B of associated front-week $Delta set to come-off
IWM will see 42% of the total $Gamma expire Friday, with -$2.9B of associated front-week $Delta set to come-off
HYG will see 55% (!!!) of the total $Gamma expire Friday, with -$3.8B of associated front-week $Delta set to come-off
The current expiration period has been tracking April's expiration.
VIX expiration seemed to lead to a decline in volatility that was released post-expiration. Here we have a relatively large stock OPEX which may provide a bounce into an overall trend lower.
Finally, SpotGamma reiterates its recent point that rallies should be framed as short covering and subject to quick and violent reversals. We very strongly believe that a major market low will come with a quarterly OPEX+FOMC combo.