Author: Aleksandar Adamovic
We have seen some huge moves in markets over past 24 hours. We wrote how extreme positioning had led leveraged players to forcefully hedge and puke equities at lows. We also mentioned that our suggestion in early October to use VIX as a global hedge had played out and we actually suggested that panic had led volatilities to overshoot and that volatility has got ahead of itself and was simply pricing in too much risk.
In order to not confuse our readers, we chose to leave commenting as our view of too much panic in the markets had to be digested by the markets.
Yesterday the big bounce finally occurred. SPX managed to bounce on the trend line as well as the big 200-day average. The first bigger resistance is to be found at the 2875 level. The first big support is at the 2800 level.
NASDAQ paints a similar picture to the SPX, but this bounce was even more powerful. The index is right at the 100-day average. The first big resistance is at the 7500 level.
Note how VIX and V2X have moved during the sell-off as well as the bounce. The implosion of volatility has been as powerful as the spike.
Eurostoxx 50 held the March lows and continues trading within the negative channel. This rather non-trending index continues trading around some kind of mean, with a small negative twist. First resistance is at 3300.
Below is a chart showing European credit, iTraxx main (white), versus Eurostoxx 50 futures (orange). Note that last time credit traded at these levels, Eurostoxx 50 traded just north of 3300.
Not only has volatility come off, but the term structure has shifted massively as well. From panic (green) to a more normal (orange) structure of the curve occurred in a few sessions. As markets sold off short vol strategies were hurt, resulting in “panic” hedging, tilting the entire curve. This has now calmed down substantially, and we imagine markets need some time to digest all moves we have seen since early October.