Analyst Who Predicted Volmageddon: Don't Even Think About Buying The Dip

Even though the threat of pervasive selling of volatility was generally ignored by the financial community and broader public, at least until Monday's historic VIX surge when a cascading short squeeze amid the inverse VIX ETN community unleashed the biggest VIX buying order in history also called "volmageddon", there were many who warned about the potential threat that the one-way VIX short pile up has created: among them were Barclays, Goldman, Morgan Stanley, Fasanara Capital, Peter Tchir, Kevin Muir... as well as SocGen's Roland Kalyoan.

Last November, Kaloyan warned about the risks of overcrowded short positions on volatility. In his Nov. 23 note, the SocGen strategist wrote that he was “less enthusiastic” about equities in 2018 and warned that the number of short positions on volatility could “potentially strongly deteriorate the risk reward profile of equity markets" to wit:

We are less enthusiastic about equities heading into 2018 – We do not see much upside on our major equity targets for the next 12 months. We expect stretched valuations and rising bond  yields to limit equity index performances in 2018 and the prospect of a US economic slowdown in 2020 to further cramp returns in 2019. We also raise some concerns about the quantity of shorts on volatility, which could potentially strongly deteriorate the risk reward profile of equity markets.

Two months later that's precisely what happened.

Fast forward to today, when he has a similar downbeat message to investors: "don’t even think about buying the stock dip." Why? Because it was never about vol: that's just a symptom of all traders being on the same side of the trade, instead it's all about the 10Y, something we showed earlier today when we observed the sharp adverse reaction to the 10Y yield spiking back over 2.50%.

“Equity investors have had an amazing time over the past four-five years,” Kaloyan told Bloomberg in an interview. “But now, the surge in bond yields is reaching the pain threshold for equities.”

As a reminder, it was the 10% hitting 2.85% last Friday that launched the 666 point Dow Jones dip (followed one day later by a crash nearly double the size). It was also the 10Y's reaching 2.85% earlier today that halted the surge in the S&P.

Rising bond yields is set to put pressure on already-stretched stock valuations, he said. “With the 10-year Treasury yield reaching the zone of 2.5 percent to 3 percent, it means that fixed income becomes attractive again when compared with equity dividend yields.”

Kaloyan also said investors should "not be fooled by robust corporate earnings momentum as analysts rush to upgrade profit forecasts in part to reflect the tax reform, because the market has already priced in all the good news on that front."

To be sure, one can counter that Kaloyan has merely become exceptionally bearish: after all this is how we introduced his 2018 outlook back in November: "Get Out Now: SocGen Predicts Market Crash, Bear Market For The S&P."

But it's not just Kaloyan: another warning comes from an analyst who until very recently was an unabashed permabull, Morgan Stanley's chief equity strategist Mike Wilson, who last year had the highest price target for the S&P. Wilson has joined a growing chorus of warnings to get out and not buy the dip, and in a note released this week, wrote that he expects "further downside in the near term as markets continue to digest shocks... This should take several weeks however and we are in no rush to buy this dip as we wait for better technical signals."

Comments

east of eden Wed, 02/07/2018 - 14:55 Permalink

10Y US treasury is surging through 2.85. It will likely break 3.0 by the end of the week, then.......

I expect that where we end up (in the short term) is 2.5 on the 2YR, 3.0 or better on the 10YR and 3.5 or better on the 30 year.

Now is not the time to buy. Now is the time to hibernate.

Paul John Smith Wed, 02/07/2018 - 14:58 Permalink

It's only commonsense to buy the dip ... keeping buying it ... keep shooting up heroin and snorting coke too ... also ... that fan-blade on the helicopter? - run right into it ...

khnum Wed, 02/07/2018 - 14:58 Permalink

300,200,200 these have been the ramps to stop it going negative so far this afternoon can you bet against an infinite money supply?

Paul John Smith khnum Wed, 02/07/2018 - 15:01 Permalink

Good point - but now it looks too obvious: the FED/Treasury intend to crash the dollar ... the real question? - can the dollar appreciate in value, at this point, AND the stock market keep going up? Maybe, if people pile into equities because there's no value to be found in bonds. On the other hand, this will be inflationary - but according to the FED inflation is still low ... so ... we're ok?

In reply to by khnum

SDShack Paul John Smith Wed, 02/07/2018 - 19:06 Permalink

My take is the Fed/Treasury is intent on crashing all Fiat EXCEPT the Petro$. I think we are starting to see the Sociopath Central Banks being forced to feed on each other. I believe the long game has to be to weed out the weak (non-military backed) Fiats to leave the Petro$ standing. Yen, then Euro, and eventually an attack on the Yuan. If this means all out world war, so be it. There is a reason why the USSA spends 10x more on the military then anyone else does. Really long term, even the Petro$ will probably be eliminated in favor of the NWO elite cashless crypto. But the weak non-military backed fiats have to fall first.

In reply to by Paul John Smith

Iconoclast421 Wed, 02/07/2018 - 15:03 Permalink

There is a lot of money parket in funds that have to maintain a certain percentage of their assets in bonds. As bonds drop in value they are forced to sell equities to maintain that ratio.

SDShack Iconoclast421 Wed, 02/07/2018 - 19:13 Permalink

Rules, regulations, and laws are for little people, not the elites. If they need to change the rules, to benefit themselves, they will. They will use the rules, regulations and laws to weed out the weaker players and consolidate wealth/assets. Remember TARP? Remember AIG and Govt Motors? How about Lehman Bros, Bear Stearns, and MF Global? Tell me how the rules, regulations and laws saved those bondholders.

In reply to by Iconoclast421

Peak Finance Wed, 02/07/2018 - 15:16 Permalink

So the REAL question that no one is asking and really the only question that matter is 

WHY is the Fed reducing their choke-hold on the 10 year? Testing their upper and lower bounds or something? 

Seeing how bad things get, how quickly? (LOLZ answer: really bad really quickly, literally overnight)

So, Fed dudes, experiment over? 

ReturnOfDaMac Wed, 02/07/2018 - 15:21 Permalink

Poppycock!  Bullish. BTFD.  Taking out a max HELOC to BTFD.  After this quiet period is over, the buybacks resume with a vengeance, and C-suite execs can execute their options again, it's Katie bar the door.  I expect a massive rally 'till prolly this summer.  When the mid-term political bullshit fair starts.  When the airwaves are filled with Red/Blue dungware, ALL bets are off.  Plan to be out by then.

BarkingCat Wed, 02/07/2018 - 15:22 Permalink

I am so happy this nice altruistic man would give us this free advice.

I am sure that there are no ulterior motives. After all, an international investment firm would never try to mislead the general public.

LeftandRightareWrong Wed, 02/07/2018 - 15:33 Permalink

"We are less enthusiastic about equities heading into ____ – We do not see much upside on our major equity targets for the next 12 months. We expect stretched valuations and rising bond  yields to limit equity index performances in ____ and the prospect of a US economic slowdown in ____ to further cramp returns in ___."

Copied and pasted since late 2009.