How fearful should you be?

The Market Ear Picture

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Muted VIX in a pic

VIX is not higher than where it was on previous sell offs this year when the index was much higher. GS writes: "Even though the VIX’s reaction to recent spot downside has been mild, its high starting point leaves vol high overall, and we like strategies with a short volatility bias, including put selling and 1x2 call spread overlays." We agree on this point.

Source: GS

Hedging ain't easy

Vols are not cheap, which makes hedging a problem for most fund managers. The PPUT index is down almost the same as SPX itself and the PUTY index (selling 2% downside puts) has beaten both the above indexes. Now you understand how rich vols are...

(The PPUT portfolio is composed of S&P 500® stocks and of a long position in a one-month 5% out-of-the-money put option on the S&P 500 (SPX put), CBOE).

Source: Refinitiv

WHEN you hedge matters

Goldman Sachs shows that the timing of your hedging matters big time. The investment bank writes: "10-day close-to-close realized volatility of 37% seems consistent with a VIX in the 30’s, but that metric is currently much higher than realized vol measured at other times of a day. If prices are collected at noon NY time instead of the close, SPX 10-day realized vol would be below 20".

Food for thought for the short gamma dealer community...

Source: GS

Is the inflow tanker really turning for good?

Fund flows / rebalances are likely to continue to be a key driver of price action in the coming weeks / months. The chart below does a good job of highlighting how US Equity MF + ETF flows have started to turn (blue line), but the inflows are still large over the last eighteen months. It’s also worth noting how the Equity percentage of overall AuM is also in the 96th percentile on a 5Y timeframe.”

Source: MS QDS

When will retail army capitulate?

ARKK is like the 16-year old new recruits trying to defend Berlin in April 45...But when will overall retail capitulate? JPM: "When we look at the single-stock flow, the shift towards less buying / more selling over the past 6 months is quite notable. That said, the magnitude of buying in 2020 (post March) through late 2021 was quite large (i.e. selling could take some time to reverse this) and the recent selling has not quite hit the same levels we saw at the end of 2018 or March 2020"

Source: JPM

"Super bullish on megacap tech here..."

A refreshing contrarian view from Gavin Baker: "Super bullish on megacap tech here - great inflation hedges, broadly growing revenue/gross profit over 10% with high ROICs, generally trading at all-time low EV/FCF and P/E multiples and almost all aggressively buying back stock......All-time is a long time. This isn’t 08. Or 00...... Also as cheap relative to the market as most of them have ever been.....There are a lot of fairly asymmetric 20% plus 5 year IRRs"

Gavin does however admit to often being "early". Another concern is just how "contrarian" this really is...stocks / valuations might imply that it is very contrarian but Wall Street / wrong-side-of-the-street sentiment for sure singing from the same song-tune...

The breadth chart that makes you go hmmmm

Some stats on (down from the 52 week highs): 80% down 10%, 56% down 20%, 32% down 30%, 14% down 40%. Luna not included...

Source: Tier1Alpha

Stifel has found a use for Bitcoin - a "signal" for when stocks will bottom

Stifel's macro guru Bannister outlines a few interesting bullets:

1. We monitor several factors which we believe will mark the capitulatory low for stocks. One on that long list is Bitcoin...which we believe still has downside to about $15,000 (though for stocks much less downside, in our view, only ~5% at most)

2. Sinking money M2 supply weighs on equities...but even more so on BTC

3. BTC is GDP sensitive, so watch PMI manufacturing index closely "...indicating that a last, capitulatory Bitcoin drop may be still ahead."

4. Tighter financial conditions should weaken BTC

5. Bitcoin falls when ERP rises

In summary he writes that BTC is late to the capitulation in risk assets and that the wash out he sees coming for BTC will help time the equity low. Note the BTC chart is log scaled.

Source: Refinitiv

GDP matters - for bitcoin as well

Stifel's Bannister continues on the bitcoin implosion. He basically writes that BTC is GDP sensitive, and expects a capitulation BTC drop ahead as PMI manufacturing index will fall according to strategist. Chart showing the "implied" BTC price...

Source: Stifel

Fearful is not unique here

Guess we can't go negative...

Source: CNN

Source: CNN