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The Market Ear Picture

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Performance after VIX +50%

Friday was obviously a rare day with VIX up over 50%. The table below shows how SPX performed 1 day, 1 week and 1 month after VIX spiking more than 50%. The chart shows the few times it has happened in "modern times"...

Source: Tier1Alpha

Did we front run the correction?

The favorite narrative, "mighty seasonality", should have a last leg higher, but early December has been correction mode. Did Omicron simply front run the correction and upside is about to resume as the main pain trade?

Source: GS

More on the P&L pain: worse than march 20

Even *before* Friday's Nu variant-induced sell-off, MS' QDS team published this eye-popping stat on Tuesday following Monday's drawdown: "The MS Crowded Long basket MSXXCRWD is down 13% vs. the S&P 500 over the last month -- the worst rolling one-month relative performance on record (just edging out March 2020)": Think about that: WORSE than March 2020.  

Source: Morgan Stanley

Friday as a brief moment in time that marked the last local low of 2021

"While COVID is just not going away, at the risk of over-reduction, I'd argue the variable of rising case count hasn't been a significant net negative for a while: the Sun Belt episode of summer 2020 didn't derail the S&P ... the India surge this past spring didn't stand in the way of NIFTY making all-time highs ... and global equity markets haven't been overly bothered in the era of the Delta variant. along that sequence of each successive wave, here's what's seemingly clear: the link between infection and hospitalization/fatality has largely been broken, and that's the big ball for risk assets. that invites a very basic -- and very serious -- question for Omicron: to this point, it appears to be highly transmissible -- but, it's not yet obvious that it's necessarily more lethal than prior variants. what's also not clear is whether the markets will treat ongoing COVID impingements as dis-inflationary (which had been a tailwind for stocks through the prism of yield containment), or perhaps now more inflationary (to the extent it only further complicates getting the supply of goods and labor back online). with the disclaimer that I'm far from an expert in the science of the day, the market had been grinding through a lot of noise and positioning pain before the most recent jolt ... if Omicron doesn't lead to a meaningful jump in hospitalizations/fatalities, I suspect we'll look back at Friday as a brief moment in time that marked the last local low of 2021". (Tony Pasquariello, Goldman Sachs) 

Omicron false alarm? Or even upside scenario

Goldman lists 4 scenarios on Omicron's effect on global growth. In the downside scenario global growth for 22 gets cut by 0.4% but that comes back in 2023...The more interesting ones are the "false alarm" and "upside" scenario. Goldman: "In a third “false alarm” scenario, Omicron spreads less quickly than Delta, and has no significant effects on global growth and inflation. In this scenario, the sharp rise in reported Omicron cases in Gauteng may reflect skewed sequencing, other data issues, or superspreading events. Finally, any ability of Omicron to outcompete Delta in South Africa does not necessarily carry over to other geographies with higher vaccination/lower prior infection rates. In a fourth “upside” scenario, Omicron is slightly more transmissible but causes much less severe disease. In this speculative “normalization” scenario, a net reduction in disease burden leaves global growth higher than in our baseline. In this scenario, global inflation likely declines more quickly than in our baseline scenario because the rebalancing of demand from goods to services, and the recovery in goods and labor supply accelerate". (Goldman Sachs)

VIX term structure - now that is all over the place

Quick chart of the VIX term structure going back to last Wed when everything was "normal", then the shift on Friday which was one of the more extreme VIX reactions we have seen in a very long time and finally the shift lower today again. The moves in the short end of the curve have been absolutely huge, both ways.

Source: Vixcentral

The bitcoin bounce

Bitcoin managed bouncing on the longer term trend line and the 100 day moving average. 54k remains the big support. First resistance comes in around the 60k level. Note the 50 day slightly above that resistance at the moment. For us bitcoin remains stuck in a consolidation and has done nothing since early Oct. Trade it with a mean reversion mind.

Interesting to note is that skew has continued moving lower.

Source: Refinitiv

Source: Genesisvolatility

Russell - if this is the bounce...

...we ask ourselves how a possible move lower would look like from here? Follow the stuff that was the weakest on Friday, or the stuff that held up relatively well?

Source: Refinitiv

Oil to overshoot to $125/bbl in 2022

Hello Supercycle IV! JPM out with provocative report named: "OPEC+ 'Show me the Barrels'; $150/bbl on the horizon as capacity shocks". JPM: "We see LT $80/bbl Brent (real) as the marginal cost to deliver a balanced market in 2024+. Incorporating our model of OPEC+ true capacity, we expect oil to overshoot to $125/bbl in 2022 and $150/bbl in 2023 (JPM Commodities base case avg. $88/bbl 2022, $82/bbl 2023)".

Source: JPM

Not all vols are equal - oil edition

Oil volatility had the most extreme move on Friday. Black gold is marginally higher as of writing, but OVX is down less than 5%. People are pricing extreme stress for oil. It looks like people are starting to confuse oil direction with pace here.

Chart showing VIX vs OVX.

Source: Refinitiv