Thursday, December 18, 2014
morning comment on VIX and junk
This gap down in the $VIX:
But this gap-up:
is far too much, far too fast.
Then again, that gap-up might only be there because the drop had been entirely driven by shorting, and now the shorts are covering.
I really feel a lot of the last few weeks' moves were driven by shorting - short ruble, short MICEX, short junk, and (maybe by extension) shorting of things like the R2K. They were all supposed to be slam-dunk trades, so everyone should have waded in.
The first clue this was true came on Tuesday, when a report that ruble trading would be suspended drove a rumour that Russia was going to enact currency controls. Suddenly there was a bounce not only in the ruble, but in the MICEX and oil and HYG.
The possibility there was that these short plays had become ubiquitous fads, and the threat of nonconvertibility complicating everything drove people out. Like someone smart in a blog that I linked to said a few days ago, the market's tendency is to go where it thinks everyone else is going - and once you think people are leaving the boat, you want to clear off and not be left the greatest fool holding the bag.
Then on Wednesday there was more covering, so it seemed. It felt like some people didn't want to hold these short positions when the Fed statement came out. Seems the market always clears out and goes quiet before these things. HYG had bounced back and oil had bounced back, in advance of the Fed statement.
There was also a story on the wire about Russia taking strong further moves to deal with the currency crisis, which also could have driven people out of their ruble and MICEX shorts. The central bank actions might have succeeded, y'know, or at least the idiots at the hedge funds who know nothing about economics might have been scared that they would have succeeded.
And there was apparently some data about US oil stockpiles that maybe made people reconsider the possible remaining downside in oil. Hard to screw up the courage to short oil when you don't know if it can fall to $20 or just to $50 - and I'd think you won't short it if you've already made money in the drop from $90 to $55. You'll probably take your money and run, right? Let the fools chase the last 10-20%.
Then Janet Yellen came out for the presser and changed the tenor of the discussion by presenting her perfectly intelligent opinions about what oil and Russia actually meant.
Once you break the back of a one-way trade by forcing some people out, I don't think it can get moving again - at least not without new information that the market participants all will interpret as telling everyone else to get back in.
So I think most people in these trades began to fear that other people were beginning to fear that everyone would get scared that everyone else was about to bail out. Sorry about that sentence, but like the really smart guy on that blog said a few days ago, it's what market participants expect from their neighbours that matters.
So we'll have to see if yesterday's and today's pop in US equities can be sold into or not.
And the problem I have is, going by that HYG chart above, the high yield trade does indeed have room to get sold into: wasn't Whitey saying just yesterday that all these indebted junior oils are about to go bankrupt and default on their debts? Has that been fixed? Doesn't HYG have to move lower to improve its yield to take this new threat into account?
Anyway, as Steenbarger says, we'll need people willing to hit the ask at these prices for the market to move up.
We'll see what happens.