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.
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.
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.