More Rotation from Growth to Value

At the end of every update, I bring everything together summarizing my view on the market using the information here, while also considering research from bulge bracket banks which I read on a regular basis.

Keeping today’s update short following yesterday’s longer post. Ever of since the weak jobs data there have been some large VIX call trades coming through my screen. For instance, today’s flow below (sorted by size) was heavily weighted with OTM calls purchases. Part of today’s flow is investors reestablishing hedges following VIXperation, but we’ve seen large VIX call trades outside of VIXperation as well. All this VIX action has people asking me how high I think the VIX will go in this net pullback.

Going back to 2000, I looked at years where the VIX spiked above 30, then fell below 30 (recovery) only to spike above 30 again later in the year. It’s happened in 28% of the years (all years/months where it occurred shown in the table below) and when it’s happened it’s never happened before September. The reason why it doesn’t happen often is because once it happens people are eager to prepare for the next volatility spike and when it doesn’t happen you get what we got over the past 2 months: tons of VIX OTM calls, market makers hedged with VIX futures, and if you get low realized volatility, the market maker just dumps futures all month long. Of course, once others notice all the OTM calls bleeding they pile on with the VIX puts putting additional pressure on the VIX, and voila, you get super low vol like we’ve had recently.

Are the odds better than 28% this year? Feels like it. We’ve got the jobs market which might be falling apart, inflation that might be ready to pop higher, and a president that will say and do whatever he wants, so to me, it feels more like 50/50.