Be Careful What You Hedge

Earlier today, before the surge in equity futures, we outlined our arguments of why being a bear here is not a unique view. Since then global futures have been ripping higher. The pain trade, given the extreme bearish sentiment and positioning, should be a move higher.

Below are a few charts worth reviewing.

Credit continues to be one of the big global risk indicators that we see as leading indicators at the moment.

US CDX IG index trades down today, and is breaking to levels we have not seen since December 20th.

 

European credit, iTraxx main, takes a leg lower as well, but is still rather elevated. Watch this space carefully, as European credit could prove to be rather rich here.

 

 

VIX is falling some 10% and trades just above the 23 level. Don’t forget VIX traded at 35 a week ago, pricing 2.2% implied daily moves for the SPX. This was just another proof of investors confusing direction with pace. VIX at 23 prices approximately 1.4% daily moves. There is still a bid for protection, but should this squeeze continue, hedges (vol, credit) will be proven rather rich at these levels.

 

Eurostoxx 50 volatility, V2X, falls some 10% as well today and is trading at 20.6%.

 

Despite the VIX falling rather hard today, and the fact it has traded down from 35 to 23, the VIX curve continues to be rather elevated. The spread between the 1st and 6th month VIX futures has come down lately, but is still in positive territory and trades “stressed”. Expect this to come in further if mighty SPX calms down and retakes the 2500 level.

 

Source; charts by Bloomberg