In our post from March 15th we wrote a short note, after having had a “classical” conversation with a fund manager. Back then he explained to us that:

“Protection and hedges only cost me money, I am sick of paying for protection. Market never goes down”.

Since then the VIX has gained approximately 40%.

We saw VIX open higher today, but as markets are trading relatively unchanged, the VIX has decided to trade unchanged as well. As always, it is hard to trade volatility as a momentum instrument, as spikes come suddenly and the mean reverting nature of volatility, later brings it back to “normality”.

What most investors fail to realize is that after a bigger move up in volatility, panic grabs the investor, and often leads people to buying protection too expensive. When vols eventually come down, the “late hedge” is often seen as wasted money, and the loop of “hating hedges” becomes even stronger.

VIX at these levels is a tricky trade as realized volatility still is not overly high, but the underlying nervousness is very much present.

So, where is the US market after this sell off?

The under performer, Tran index, has continued lower and is approaching the big 10 000 level.

NASDAQ has been on fire, but it took one day only to erase most of March gains. It is easy to get carried away, but the longer-term picture shows a “disturbing” loss of momentum for the NASDAQ. Note the flat sloping 200-day average, indicating there is no longer term trend present. 7500 is the big level to focus on should we sell off further.

SPX shows a similar picture as the NASDAQ. Flat sloping 200-day average and somewhat of a momentum loss. We are dancing around the big 2800 level, so watch any possible break below it.

The underperformance of the Russell and Transport index versus the SPX and NASDAQ continues. The question is do you chase protection or wait for it to become slightly cheaper, again?

Source, charts  by Bloomberg