VIX suggests little Fear as Markets Fall

Wednesday saw quite a substantial sell off in the US markets with the Dow down almost 300 points and the ES and Nasdaq down similar percentages. Thursday saw some further selling pressure pre cash open, with the Nasdaq printing down over 50 dollars and the ES down 20 points. At that moment you begin to think will the buy the dip pattern hold, or is this the time when it is just going to go.
One clue was the VIX, with the move up in the UVXY only 8% which isn't much considering it has lost 60% plus of its value in the past month or so. It was interesting watching the VXX and UVXY trade as it would reluctantly go up as the market was going down, but on any up tick it would be smashed back down.
All the VIX futures are trading in Contango meaning there is less near term fear in the markets, and hence the bounce was to be expected as the 20 point pre market down move was made back up by the end of the session.
It seems buy the dip is here to stay for a while, as long as easy money is available.

My long VIX plays are not playing out as I hoped so I have just continued to roll them in order to give me duration, however I have lightened my deltas slightly so not to leave me too exposed. Next week is a short week for many of us, although NFP will still be traded on the Friday with most of Europe shut. This is likely to mean the markets will likely be far more illiquid around the time of the release. However the number will likely have a greater impact on the markets as the FED is indicating raising rates at some point this year.

Worsening Macro Environment Lifts Stocks

The FED downgraded the Economic Outlook yesterday despite removing the "Patient" wording.

For the past few months, worsening outlook and worse data is stock market positive.

SPX regained 2100. Bonds rallied over a point, and as expected there was a dollar sell off. One of the more notable moves was in the Eur/Usd, which moved up over 400 pips on the announcement only for it to pare the whole move by today.

Euro fundamentals haven’t changed, so the big move up was exaggerated by stops before coming back to pre-announced levels.

This is the type of move which has made it harder to keep a position on. Since the swings are very big , deep pockets are required to withstand the moves.

As far as the FED decision goes, it wasn't surprising. Like I've been tweeting, they don't have the conviction to move forward with monetary policy. Since there is such a divergence with Europe in terms of economic progress.  Given the strong Dollar, it is unlikely they will pull the trigger, which is going to leave easy money stimulus on the table for even longer, which may or may not have big repercussions in the future, with the main threat  being the inflated stock market.

As far as interest rate Spreads go, shorting Short Sterling was the play as the Spreads have all come back down after a 10 tick move up. I was short 11s in the Mar17Jun17 to take a tick. It is close to trading 9s now, I will look to initiate a long position at 8s if it gets there. I prefer playing the back months as the range is much tighter, so makes picking the levels much more predictable.

 I'm still a buyer of volatility, although I’m feeling the heat on those positions. There seems to be no fear, and at this rate it looks like volatility ETFs will go to zero as drag weighs on the products, but I still believe there will be a meaningful sell off some point soon, which will push volatility up.

Volatility dragging despite Sell off

In the past few weeks the rampant upside in the market has understandably left those thinking that markets never go down. The VIX is representing this as it is trading back into the 13s last week and despite the big sell off on Friday the Volatility indexes still seem to be under pressure on every up tick in the market.

The DAX is experiencing the biggest gains on the back of the ECB QE programme. There seems to be such strong support despite the lofty price rises over the past month, its as if the ECB are buying DAX futures as part of the programme. The consequence of this programme is likely to be the same as it is in the US. Companies will borrow at ultra-low rates and instead of feeding it back into the economy through investment and jobs it will just repurchase stock  (which will prop up earnings per share), which are already at record highs continuing the buy at any price strategy.

But we can see how this can go wrong as was the case with Oil companies who repurchased alot of stock when Oil was in the 80s and 90s, and now with the fall in Oil prices stock buy backs have been suspended.

However as it stands, it seems there is no follow through to any downward move so you assume the market will continue its current pattern which is to buy into any dip.

Strategy wise I have been accumulating long Vol Positions,  as I'm looking for that contrarian play. I'm also looking to short the Short Sterling curve on the back of the big rise in the past week, with Dec15Mar16 trading 10 ticks above where it was a couple of weeks back, a short here seems like a good risk/reward play. I continue to hold my Dax short option play, and have rolled it onto April Expiry now, so hoping for a 5% correction at least in this index. Finally I have gone long some Gold in small size on the back of the big drop after Non Farm Payrolls.  

Is nothing priced in anymore?

The rampant up moves in Equities beggars the question whether any news is priced in anymore. In the past month, with markets and Stocks being at all time highs, any news that's slightly positive is met with the type of buying you would expect when stocks are at lows. You would have thought the DAX move from 9600 to 11200 would be pricing in something, but German acceptance of the Greek bailout extension for example propels the market up like there is no tomorrow and without sucking out all the volatility in this market. You know things are bad when the markets rally close to all time highs today on the back of a rumor denial of a Greek Bank running out of cash. I mean there was no real sell off on the rumor in the first place, which just shows the Algos wired into trade headlines are pushing this thin markets to more stretched valuations on a daily basis.

The words sluggish, tough, tepid are the words of choice for this market to continue its march higher. As long as the market remains this way rates will stay low and that's all it takes. A massive miss in Chicago PMI data, briefly lead to a dip in this market, for it then to rally all the way back up, because it was probably a buy the dip opportunity. There is no such things as fundamentals mattering to this market any more, its just demand and supply. Too much cash and no where else for it to go. Eventually there has to be some kind of re balance and when that will be who knows, but when it does happen, its going to be a wild ride.

Greek Headlines running the Show

Its been a range bound market the past few days as rumours regarding Greece push up then push down the markets, making it tough to stay in the market too long. Today the rumour of ECB having positive talks with Greece was then denied by German Spokespersons creating wild swings, and even after tomorrows announcement, it will not be the end of the saga as rumours will continue for this never ending rumour mill which is Greece's fate in the Eurozone.

Trading wise my long Short Sterling Spread in Mar17Jun17 worked out for 1 tick profit, getting out at 9s on the back of the Strong NFP data, I'm looking to get longs 8s again if the opportunity presents itself.
I'm still short Dax via options, and hoping for a leg down before Feb expiration, however I will look to roll over to Mar if it doesn't happen, as I do think it will drop from these lofty levels, but playing via options cause you cant under estimate the power of  QE.

Looking forward I'm liking selling Eurodollar Spreads on every rally, whilst continuing to go long Short Sterling Spreads. I will also be looking to initiate negative delta trades in Indices on any continued rally for a Scalp.

Euro Stocks keep rising underpinned by QE

So the past week or so is all the evidence you need to see QE is all that is needed for markets to smash to all time highs. The Dax which traded as low as 9600 two weeks ago, is trading at 10800 now which is a move of over 12%! Eurostoxx is trading close to 3400 and CAC is up there too. All this despite deflation, worsening data, and a possible Greek Exit.
Decoupling from reality is insane at this juncture, and while we see this one way action from these Indices I couldn't help but try a short play in the DAX which isn't really working out right now. I currently shorted the 10350/10500 call Spread for a credit of 75 ticks and bought the 10050/9800 put spread for 59 ticks, given me a credit of 16 ticks, with max risk of 135 ticks, and max profit of 260. I have till February expiration for some kind of pull-back in the Dax, which in my opinion is way overdone. Its outperforming everything right now, so if it continues higher especially over 11k then I think probabilities of a snap back is much higher.
Volatility in the Equity space has been unrepresented, with the amount of 1% swings in major averages so far this year seeming to be more then there were the whole of last year.
Bunds continue to race higher, and the Yield curve is as flat as you can get. Short Sterling continues to rise as UK GDP came in slightly weaker and inflation falling, with Mar17/June17 now trading at 7/8. I think its good value around here, so I've taken a small long position.
We see how it all pans out.

ECB does QE, what next?

So the ECB done what many wanted it to do and embarked on a 60 Billion Euro a month QE program till 2016. They have pulled out all the stops and now it’s all or nothing for the ECB, apart from continually cutting rates there’s not much more effective tools in the arsenal left for the ECB.

It is a matter of time to see whether this program works, but one thing for certain is that those exposed to the market will benefit in the short term the most from this QE announcement as the only thing it will have an immediate impact on is push Equities to higher levels decoupling with fundamentals, and is likely to continue to push higher to new all-time highs simply because it has to. Money will be flooding the system, German 10 year as I write yields 0.3% many other European yields are the lowest on record, thus the Equity market presents the best yield.

Another problem with undertaking QE is that it also needs commitment from the individual member states to act with fiscal reform to help their respective countries, and many will shy away from real reform as the ECB has taken the plunge for them.

Other countries in the European area including Switzerland and Denmark are drastically cutting rates as the Euro gets smashed and it is a stimulus overload at the moment as countries try to stave of deflation and struggling economies. Talk is that Sweden will undertake QE as well.

The difference with the QE about to be undertaken by the ECB and that which happened in the US and UK was that they began buying bonds at much lower levels, and in fact the FED and BoE must be very nicely in the green on their holdings. Whereas the ECB will be buying Bonds at record low yields and they even said they will buy bonds with negative yields. When the unwind does happen the ECB will be loaded up to the hill overpriced Bonds, surely not good for their balance sheet.

Going forward the play will be to buy the dip in Equities as the path of least resistance is up. We have seen from the past that QE is the main driver of the market, the question is how low can the Yields go in Bonds.  Bunds are touching 159, a level  I never thought I would see, but at the rate the Bunds are going higher negative Yields is a real possibility.

My longer term view is that there the massive amounts of money printing will lead to a disastrous unwind, as we saw with the removal of the Swiss cap.  There is only so much the market can be bought up on cheap money, and there will come a time where fundamentals will take over.