Are we in for a surprise growth scare; and are equities in denial?
Market has priced down growth quite a lot in the recent past
Chart shows change in market pricing of US, China, and Euro Area growth from May 3 to July 29.
The last "serious" sell off in mid July seems to have created some traumatic experiences for the market. The sell off lasted for 2.5 days, and the bounce was actually just as powerful as the move lower.
Since then VIX has traded with a a constant bid, refusing to ease, despite the fact SPX has managed to grind higher.
SPX up and VIX up is something to watch carefully. As Chris Cole once said; "volatility is the instrument of truth".
Source; Refinitiv
We have seen the SPX go on for 185 days without a 5% correction, according to GS one of the longest periods without a 5% correction in 100 years.
Source; GS
Hedging tail risk with VIX here looks rather expensive (unless you "bought" our VIX logic from a few weeks ago,here, which was the day VIX started rising in tandem with SPX).
As we have been pointing out over the past week, given the steep skew in SPX as well as SX5E we would look at put spreads as downside hedges instead of using VIX.
Given Europe's China "tilt", as well as the steep index skew, relatively short dated put spreads offer (extra) attractive ways to hedge some downside risks.
Source; GS