The recent market price action has frustrated most and has left the crowd with huge losses. Going into the recent sell-off:

  • The crowd was short volatility that exploded.
  • Hedge funds had all piled into the same long/short positions that went the opposite way.
  • USD longs have seen their position reverse brutally last 2 days.
  • China bears have been absolutely killed with the “sudden” reversal in the yuan as well as the sharp pop higher in Chinese related names. Main markets have all put in huge gains, but there are even more extreme moves in individual names. One of those is the giant Tencent, up 20% from recent lows!

One phone call from Trump doesn’t change the fundamental picture, but oh boy have people been caught wrong in this last bounce.

Tencent – 20% bounce in a few days.



In late October we argued that fear had got ahead of itself and that volatilities were trading way too rich and were suddenly pricing much more than what we saw as potential risks. The fear index, VIX, has since then dropped from recent highs of 27.9 to 18.75 as of this writing.



VIX had spiked massively during this sell off, but even more importantly, and pointed out several times on Ask Brokers, is the fact the so-called term structure had totally exploded. The entire volatility curve shifted, but even more importantly the short end of the curve shifted up massively.

This happens in times of stress as investors run in panic to buy short dated maturities as a “crash” protection. Note how the curve looked a week ago, green, and how it looked at close yesterday, orange.



Another crowded trade gone wrong can be seen by the CBOE put call ratio chart. At lows investors piled into buying puts. With the recent pop higher in equities, the ratio has collapsed.

Why not a small consolidation in equities as we digest how the phone call from Trump managed turning things around. After all we have the upcoming elections on Tuesday, and with volatilities down sharply over past sessions, the short volatility tradewe reasoned around lately has played out well.


Source; charts by Bloomberg