One Of The Greatest Squeezes Of All Time?

Authored by Kevin Muir via The Macro Tourist blog,

It seems like just yesterday the overly confident bulls were openly taunting any market participant that dared counsel about the increasing risks in the equity market.

“You don’t get it. Trump’s tax policies have ushered in a new era of corporate profitability. Why fight the rise? Nothing can stop this freight train.”

Yadayadayada. It’s always the same. Markets make opinions, not the other way round.

All of sudden, in less than a week, the S&P 500 has given up 200 points.

But what happened? Why the change of heart?

Well, as much as I would like to point to a specific economic release, or some other geopolitical development, the truth of the matter is that there really was no catalyst. Equities were simply up on a stick, with everyone chasing the ever-rising market. It was made worse by the new era of electronic trading that favours VWAP or TWAP type orders that spread the buying out over the course of the day resulting in a relentless drip higher. This had the effect of tricking market participants into believing that volatility had permanently disappeared. And in today’s low alpha world, too many investors leaned on the short equity volatility trade to pick up yield.

I have written about this risk extensively. The Source of the Next Crisis or Vol Sellers Branch Out are just a couple of the articles warning about the risks from selling volatility.

Last night, short equity vol sellers got a lesson in getting squeezed. And as much as everyone wants to enter into these complicated discussions about kurtosis or the volatility of volatility, I am going to spell it out in much simpler terms. The short vol sellers were out over their skis, and the market always punishes the weak hands.

In the space of 20 minutes, VIX futures spiked to a level that was higher than 80% from the previous close, triggering the dreaded liquidation clause in the short XIV ETN. And sure enough, it appears the manager chose to exercise that right, with the market assuming the ETN will be wound down.

Whereas a week ago no one could imagine the equity rally ever stalling, this morning the financial world is filled with all sorts of doomsday contagion scenarios about the short volatility collapse.

And could that happen? For sure. If there is one thing that we should have learned from the recent past is that anything can happen.

Yet here is an alternative thought for you to ponder. What if this was simply a case of weak hands getting shaken out? Market history is replete with examples of short squeezes that were nothing more than the stronger capitalized players taking out the under capitalized ones.

Whether it was Brian Hunter’s massive loss in obscure forward nat gas contracts or Porsche’s epic short squeeze of Volkswagen, this game is as old as the hills.

It’s almost like that the stop loss for the short-volatility ETNs was a target for market participants to shoot for.

But the real question is whether the move from the weak hands to strong ones has already happened. Will VIX short sellers look back at last night’s spike and kick themselves for getting stopped out? Everyone on the financial TV is soooo convinced that the vol trade is about to spiral upwards out of control. A good trader learns to never say never, but I am not as sure that last night’s squeeze won’t prove to be the top in VIX for this move.


mily Tue, 02/06/2018 - 10:57 Permalink

Kevin was right again with his last article about s&p*ss being overextended 2stdev on monthly, I hope he traded his convictions and his now covered in $$$ up his eyeballs

asteroids Tue, 02/06/2018 - 10:58 Permalink

Simple rule for shorting: don't, ever. The market maker knows your position and will sell you out. If he destroys you, he knows you'll never get revenge.

MsCreant NoDebt Tue, 02/06/2018 - 11:06 Permalink

I love the smell of fuckin' napalm in the morning. Ahhhhhhh! Breathe those fumes in, let the destruction run through your veins. Mother nature is a bitch and has been held back too long. She is going to have her way with everyone now. She needs growth material and she will kill fuckers to get it. Lovely lady.

In reply to by NoDebt

quadraspleen Tue, 02/06/2018 - 11:02 Permalink

actual lulz at this. All those financial experts crowing about how fucked BTC is, and lolled at how the exchanges shut down at critical times...Welcome to the partay

Vix makes BTC look like an email from yer gran

quadraspleen RealistDuJour Tue, 02/06/2018 - 11:09 Permalink

when you look at life like that, everything except your nearest and dearest are technically the value of nothing..value s what you ascribe to something..I personally wouldn't put a huge amount of value on say, an first-ed old book, but lots do..Now VIX (and XIV and the myriad of instruments spun off it) really are dogshit. Cryptos (imo) not so much..each to their own

In reply to by RealistDuJour

NoDebt Tue, 02/06/2018 - 11:03 Permalink

I'm piling into my "safe haven" assets of Google, Amazon, Netflix, FaceBook and Twitter.

Twitter?  Did I just put Twitter in that sentence?  Jezuz, I must be off my game today.  NOT fucking Twitter.  Everything else, though, yeah.


economessed Tue, 02/06/2018 - 11:10 Permalink

As I see it, the equity (and to some influencing extent, the bond) market have operated since about 1983 on the premise that you can perpetually earn a return by extracting wealth from the real economy.  That is true in the short term.  It's called arbitrage, and it's a good thing because it supports price discovery, or what I would call "an efficient market."  But to think you can do this forever is misguided.  The effort and energy expended to squeeze the last little advantage out of this scheme through more complexity (math = algorithms; physics = technology) and obscurity has been breathtaking.

Markets are expressions of every human emotion in one location.  Greed, fear, etc.  But they are built on a foundation of trust, and trust can't be fabricated out of bullshit.  There isn't a sustainable way forward when nobody trusts anything they see, hear, or interact with.

Endgame Napoleon economessed Tue, 02/06/2018 - 11:44 Permalink

Well, then, people should just invest in some safe-storage harbors, like gold and BitCoin, and then risk money on companies they actually believe in due to product quality and quality jobs created. But they say you cannot make money on stocks unless you buy low, and most of the companies people believe in have stock that is too high for ordinary people to make any money.

In reply to by economessed

homebody Tue, 02/06/2018 - 11:23 Permalink

Damn ZH finding every negative comment out there - fundamentals are all good but debt still a problem.  If expansion does not start to decrease the debt, next stop Venezuela hyper inflation.  Lets get on board to turn this Obummer ship around.  Fight every liberal globalist billionaire trying to control the fucking world.  

Endgame Napoleon homebody Tue, 02/06/2018 - 11:53 Permalink

The only people who can afford to regard 94% part time / temporary job growth since 2005 as “good” are rich or insulated by governent jobs, dual-high-earner babyvacationing jobs or welfare and tax welfare for working part time as a womb-productive citizen, legal or illegal immigrant to qualify for monthly welfare that covers rent and groceries and now-doubled, refundable child tax credits that — at the the $6,444 max — were 1/3rd of the yearly, full-time take-home pay of most workers in many states before doubled by Congress. The Swampians did not double tax welfare for the womb producers because they are working full-time jobs at decent wage levels. 

In reply to by homebody

Soph Tue, 02/06/2018 - 11:35 Permalink

There's not enough exposure in these products for all the "fear" mongering being generated at ZH.

Yes, it's a correction. Not surprising, not overblown, and very much needed. Part of the issue is that a good chunk of the readers here have little/no trading experience, or alternatively only a very short history of trading (<10 years). So this sort of thing seems really exciting and abnormal, when it really is far from that.

And the other piece of the puzzle is that we KNOW the central banks will get back on the bid hard IF (and that's a big IF) this gets to be a turn rather than a correction.

The run will continue in due course. No crisis, it's just a correction. Nothing to see here, move along.

Blankfuck Tue, 02/06/2018 - 11:37 Permalink

Amerika, built on fraud, Amerika built on ponzi, Amerika built on false lies

Amerika, built on fraud, Amerika built on ponzi, Amerika built on false lies

Amerika, built on fraud, Amerika built on ponzi, Amerika built on false lies

Amerika, built on fraud, Amerika built on ponzi, Amerika built on false lies

Amerika, built on fraud, Amerika built on ponzi, Amerika built on false lies

Amerika, built on fraud, Amerika built on ponzi, Amerika built on false lies

Amerika, built on fraud, Amerika built on ponzi, Amerika built on false lies

Amerika, built on fraud, Amerika built on ponzi, Amerika built on false lies

Amerika, built on fraud, Amerika built on ponzi, Amerika built on false lies

Endgame Napoleon Blankfuck Tue, 02/06/2018 - 12:11 Permalink
  • The rest of the world—-built on angelic altruism and law-abiding practices, like mass-scale, illegal immigration and working under fake SS #s, when not working under-the-table to avoid taxes, but collecting $116 billion in yearly welfare that is funded by taxes;
  • The rest of the world—-built on dictatorial mercantilism, where you supply low-cost labor to tempt the greedy foreign manufacturers, buying mostly counterfeited products made by your own country’s government-financed businesses due to strict, moral observance of law, causing massive trade deficits and mass underemployment in the countries that exported jobs to your country, helping to built it up; 
  • The rest of the world—-built on the arrogant confidence that, while America is constructed on lies, the rest of the world is built on pristine purity, intellectual sophistication and everything that is moral, good, kind and non-calculating. 

Swampland For Sale in Florida, Rather Than all These Fluctuating Stocks, for All Who Believe that America is Bad, While the Rest of the World is Free of Evil—- 


In reply to by Blankfuck