FORCED SELLING = FORCED CUTTING

CLUB/EDGE client post August 2nd. Focus on VIX, GOLD, & THE YEN CARRY TRADE UNWIND

» CLUB/EDGE client post August 2nd, 2:43 PM.

"VIX 20 And Then Let's See"

Wednesday's bounce trapped a lot of bulls.
I doubled down with my continued market call for SPX 5376 + QQQ 449 with VIX to 20 from weeks ago.

But VIX didn't neatly tag 20 and sell off as expected.

SPX opened BELOW 5376 and that is a a "press short" in my book, as it leaves a daily Head & Shoulders AND Island-Reversal pattern above. That is why I said near open that SPX staying below 5376 is very bearish.

Only reason why QQQ is holding 449 daily gap price target is because AAPL is green + NVDA is trying to bounce - exactly as massive puts are piling into NVDA for next week's OpEx. Just sayin. I don't trust either of them, and here's why I want to focus on VIX as one tell; Gold as the other.

@Alpha_Ex_LLC weighing in on the significance of this VIX move - check out the outlier from today:

AUG 1st

VIX move is vastly "outperforming" the move down in the SPX.
Typical "beta" over last couple of years is around 4. Today, the VIX is up 8x the down move in the SPX.
Implied vol of vol is soaring with the VVIX up more than 20%, something that's happened just 23 times in the past.
In good company here, MEME of '21, Pandemic in '20, XIV of '18, China Aug'15, EZ Sov Crisis '11, GFC in '08.

AUG 2nd

VVIX up 45... there are only two other days when it rose by more than 40... GME on 1/27/21 and XIV on 2/5/18. both of those nearly broke the SPX vol market.

So, VIX tagged 29.66 - a high not reached since the March 2023 bank crisis - with a VOLMAGHEDDON VIBE.

And that's why I was a bit speechless this morning while I looked for a market bounce but couldn't find any!!

And sure, as of this afternoon, we have fallen slightly - back to my 25.20 monthly support/resistance area which I gave as market bearish if above, bullish if below to help clients navigate after I close my trading room.

But truth is, spot VIX can stay elevated until we get a macro trigger to buy markets.

I know you want to laugh out loud at that, but hear me out.

Post FOMC decision not to cut - a mistake in my opinion - the Powell presser made it seem like Sept rate cut was on-the-fence. Odds dropped from ~20% bet for Sept 50bp cut and from 100% to 80% bet for 25bp. Another words, he was too hawkish. 10Y2Y steepened sharply and global yields - not just US - crashed.

THIS is the market telling him/Fed that they are wrong and behind the curve.

My bet: FORCED SELLING = FORCED CUTTING.

And it will not be 25bp but at least 50bp and it may even come sooner if market continues to sell down - potentially into Nov 1st "Fed Pause and Yellen Yahtzee" levels.
Think: Powell at Jackson Hole - which is a full three weeks away until August 22-24!
Any earlier and they will appear panicked making matters worse.

VIX In Backwardation As A Timing Tool

I have discussed my fear that VIX was not done and we were headed into backwardation, which is why I was so confident to press short these past few weeks (and ignore Wednesday’s bull trap).

But now we need to interpret this indicator closely.

The value of the spot VIX Index itself is determined by how traders of SP500 options are pricing volatility premium.
When traders see a lot of risk, those selling options demand higher pricing. Make sense? SPX put values are up nicely as a result ;-)

So, when my VIX 3month futures spread compared to spot VIX goes negative, it can be an excellent time to buy the market.
It can be a great tell that VIX sentiment and IV expansion in SPX puts have gone too far. VIX should revert lower and market bounce.

But... it can also be a signal that all-is-not-well and there is a reason for the spike in VIX and the oversold conditions (negative for this spread and markets).
Oversold can become further oversold.

Also important to consider: know your timeframe.

During the protracted correction of 2022 - where SPX fell 20% and NDX -35% peak-to-trough - my VIX Backwardation spread went negative before bounces, while the market continued its downtrend. Another words: these VIX rallies did not end the market's downtrend; they only brought temporary relief rallies.

That's why I must use other Tells to time a reflexive bounce - or not.

GOLD As A TELL

GOLD as a COLLATERAL TRADE is a good asset to track for seriousness of this correction.

Gold selling off could mean the global margin call I referenced in my earlier post is in fact warning of a full-blown deleveraging event.

THIS is why I got particularly nervous this morning live commentating.
It is not a good feeling to bear witness to a major liquidation event - so apologies for my stuttering breathlessness this morning - but liquidation is what I want you to guard against.

Another read: it could just mean money that is going home...

Yen Carry Trade Unwind

We have had ~13 years of investors (read big money) borrow yen at wicked low interest rates.
They converted yen to US dollars mostly (other currencies too).
They invested this cheaply financed and highly leveraged money in highER-yielding assets - READ: US STOCK MARKET NAMELY TECH.

When the yen strengthens, like it has as USDJPY has fallen from 162 to 146 against the dollar, foreign assets (READ: US STOCK MARKET NAMELY TECH) are sold to buy back yen to repay those loans.

A strengthening yen also makes gold less attractive so it is not easy to know if this is just rotation out of gold into yen OR ... (soon) FORCED SELLING out of gold as gold also serves as a collateral trade against margin calls.

So with that, remember my big picture warning for clients JULY 25th:

MY WORLD VIEW POEM:

Credit spreads compressed.
Volatility suppressed.
Currency depressed.
From Policy Interference expressed.

We have Quantitative, Monetary & Currency EASING
Which is LIQUIDITY producing versus seizing.

Deflation & Devaluation BEGETS Derisking & Deleveraging
Bonds were already sold. Equities are now way too bold.

And NO, Bitcoin will not fix this.

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OK, so these were the Big Questions I got from clients this morning that I wanted to answer in writing for all.

I hope it has helped. I will post a few key charts under my #intermarket-tells to remind that this is A TOP that will have strong counter-trend rallies into A BOTTOM. Also remember, this timing is not unexpected. Market is seasonally weak from July 17th into September/October OpEx. The problem is that the Yen Carry Trade will determine that finale most likely.

Eyes on USDJPY and Yen; Gold and Credit Spreads; Cumulative Volume and Breadth; SVXY and BXM.

GOOD LUCK AND YOU'VE GOT THIS!

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HOUSEKEEPING:

My Live Trading Room IS OPEN NEXT WEEK while I am on vacation.

It will be run by Hans Albrecht of #options-mentor-hans along with active market analysis & trade support by @archnakj @Rithika @Mikey Bot @Nel @Tiff - with @Craig Shapiro @Geoffrey Fouvry @Alex Kenton working directly with EDGE clients and posting their analysis in their channels! I wish you all a fabulous week.