Market Analysis

VIXplosion

It’s that time of the year again, the ritual $VIX crushing as markets are relentlessly drifting into the Sell Zone in anticipation of rate cuts from the Fed and more stimulus from the ECB. When central banks go wild, volatility dies.

Tomorrow markets will hear from ECB head Mario Draghi, the central banker who never raised rates and excelled at only one thing: Blow the ECB balance sheet to 40% of Eurozone GDP. Bravo:

And it’s produced so much growth:

And so better start raising the prospect of doing more of the same, more QE:

Heroes of our time.

That’s the world we live in. No wonder the $VIX gets crushed in mechanical fashion this week:

That’s a lot of $VIX crushing for very little marginal gains I would argue, but nevertheless there it is.

But what has been the pattern over the last 4 years? $VIX compression leading to $VIX breakouts:

I would argue what we’re seeing now is no different:

While not all index gaps fill, not the same can be said for $VIX: All $VIX gaps fill eventually.

And there is an open gap in the 24/25 area courtesy Jerome Powell when he delivered his ‘flexible’ speech in early January leading to the renewed compression phase we’re in now, a clearly defined descending wedge pattern again. Note the cute fake breakout earlier in the week.

I may not be alone in the view that $VIX is setting up for another breakout this summer. Over 359,000 calls on the August 21 $20 $VIX strike were traded today easily dwarfing the put volume by 10:1.

$VIX may still drift lower to the lower trend line, but the pattern strongly suggesst a VIXplosion is still to come this year, and perhaps not that far away.


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24 replies »

  1. The irony is the central banks around the world are sowing the seeds of the “People’s QE”, MMT, UBI, etc as they inflate markets globally for the top 10% most wealthy humans. Zero rates, zero time value of money, zero natural price discovery, zero volatility, and zero chance it works forever. Our central bank “Heros” are central bank “ZeRoS”! —->Sven, you should use that as a title…=)

  2. I think a good question to consider is: at what point do the macro fundamentals of earnings recession and global slowdown finally take over from the inexorable pull of Central Bank ZIRP money drugs? I know at some point, risk aversion will finally set in and prices will change quite quickly, but the drugs are pretty powerful.

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