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Since it is calculable, if Vix existed in 1987 studies show it would have hit 150.
I see the potential for something like this to happen again near term and here’s why:
I see the potential for something like this to happen again near term and here’s why:
1/ L/S mkt neutral funds are levered as high as 20-1 due to their inherently low annualized std deviation versus the market. There are many firms and billions of $’s available to both retail and institutional shops that will lend 20 to 1 on a high sharpe ratio low vol L/S strat.
2/ Most of these highly shorted names are crowded which suggests many of these L/S strats are correlated. So if more highly shorted names continue to rise, more deleveraging is coming on the long side and it will be forced.
3/ BOFA fund manager survey shows fund managers are at their lowest cash allocation in years so they don’t have the capacity to step in and buy.
4/ Momentum strats are also just starting to take exposures down as ES closed below the 50 day for the 1st time in months.
5/ Market participants have been talking about a correction for over a month now and February after inauguration tends to be a pretty crappy month at -4% avg historically.
6/ This is may be the most important one that will give pause to anyone trying to step in front of a freight train. Portfolio turnover from late Feb 2020 to the March bottom was absolutely massive. As we approach those 1yr anniversaries the gains from the lows flip to ...cont
...long term capital gains. Significant tax benefit for anyone who bought stock up until the March low is around the corner. We all know this rally has been mainly PE expansion due to ZIRP & added QE so everybody knows that everybody knows chips need to be taken off the table.
7/ So we have a spark for deleveraging and the market knows long term investors will be inclined to sell stock in late Feb and March as they cross their 1 year anniversaries and sit on massive gains.
Seems like a pretty bad setup to me.
Seems like a pretty bad setup to me.
