Profile picture @mcm_ct
, 10 tweets, 6 min read Read on Twitter


What that got to do with the markets right now?

Well, inverted $VIX has been lagging the #equity index’s and that is a big deal. The reason it is a big deal is because the of VOL TARGETING

Volatility targeting/control strategies aim to control risk by BUYING $VIX as $SPX drops and liquidating $SPX as $VIX rises.

When $SPX makes new lows but $VIX does not the implication is these insurance products continue to buy #ES_F futures while sell $VIX

So what so we have here? We have an entire sector that has built a model where a divergent $VIX = increased $SPX buying via #ES_F futures.

This strategy is roughly $1 tillion in notional and like $SKEW is showing, hopelessly underhedged vs a downside break

Why is this relevant now? Its because Volatility Targeting strategies are more long than they have been in a long time, based on model ideals. So, in an illiquid market, tactical/strategic exposure is likely to reassess those BUYS as soon as inverted $VIX confirms $SPX

If only a small percentage of $1 trillion of #ES_F notional were to be liquidated in this illiquid environment at same time as long $VIX exposure was to be increased - we end up in Kuroda’s/@RayDalio’s virtuous cycle where MORE $VIX BUYING = LOWER #ES_F/more #ES_F Selling

Market structure is completely broken - this is why @CMEGroup is willing to violate the sanctity of the futures markets price discovery to attempt to hold off the inevitable. Insurance companies/Vol Targeting strategies will dump #ES_F as soon as $VIX rises no matter what

there is no alternative, this means while $VIX action was positive last week on a technical basis Vol control strategies are BUYING #ES_F since $VIX is not at new highs w at #ES_F lows & in an environment where theres not enough liquidity to dump positions at decent prices

What’s the net effect of all this? Well, at worst possible time insurance firms are exposed to tail risks they were 100% seeking to avoid & in the largest exposures in recent history in the most illiquid episode in recent history. Sets up conditions for tails in #equities

Absolutely believe that any progress via the $VIX index this week will unleash an iterating cycle of increasing $VIX begets Vol Targeted #ES_F selling which begets increasing $VIX which begets Vol Targeted #ES_F selling which begets $VIX buying till credit is exhausted
10/ wish all the luck in the world to traders this week BUT what we see is epic complacency were a divergence in $VIX and $SKEW is anything but bullish - its representative of all the influences that will cause outsized downside extensions and damage to the markets
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