Wednesday, December 31, 2014

US market rollover?

Yet again,

 junk is threatening to roll over,

and that means $VIX might pop yet again.

I felt stupid selling my XIV over the past week, but feel less stupid now. Also dropped my double-long Nasdaq, but both of these actions were inspired more by wanting to take leverage off when S&P hit new highs. I'm happy to leverage a retrace, not so happy in blue sky.

Partly interesting is that IWM and banks have stood up fairly well, and they're the breakout sectors.

What's more interesting here is the lows in HYG have been deeper on each spike. December's $VIX pop wasn't as severe as October's, but then again if this one bottoms out at only 14 that makes the future look a bit more scary from the $VIX perspective.

Though, just as a reminder of my position on the topic, I think $VIX is acting funnier than it should be because so many people short it through XIV, which they never used to do before, and someone on the internet said that XIV's market cap is a significant proportion of the size of the outstanding front-end $VIX futures positions, which means that buying and selling XIV will have an outsized effect on the intraday $VIX indicator, which will then drive the algos nuts and inspire more selling than is rational.

Which is good for traders but mortifying for buy and hold.

The long-term higher lows in $VIX that we've seen, and longer-term underperformance of XIV versus SPY that we've seen since June, makes me feel justified in my beliefs. Maybe XIV is now so large that it's killed the beta of shorting $VIX: but what would a XIV that size do to $VIX futures and volatility of $VIX, do you think?

Anyway, food for thought for you.

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