PLAYING DEFENSIVE
Set Up For A VIX Unclench
When Negative Vanna Will Matter
Updated Wonky Rate Differential Intermarket Tell
Consumer Cyclical Rotation Engaged
That AI Air Pocket of Risk
Set Up For A VIX Unclench
Lots of bounces which made for great chases, but no new trends emerged this week. Also, no pullback into Friday like weeks of late.
Why? the volatility crush was outsized, setting up a “VIX unclench” should FOMC meeting disappoint. It’s a binary bet but one that would not surprise me to trigger a 200pt pullback in SPX - regardless of outcome.
Case in point: VVIX (vol of vol) has stayed ‘clenched’ sideways for 7 days now - while VIX fell for each of them. Unusual.
VIX returning back to Mon 10/27 level of 15.54 - the level it bounced to 28 on 11/20 - so four weeks to advance 81% and two weeks to revert 100% of that move. Also unusual.
Market ignored the US 10Y yield rising 15bp from my 3.99% line in sand approaching my 4.2% - which corresponds with TLT short as noted last week. The way I look at it: whether the Fed cuts or not next week, longer duration yields will rise - just like they have past THREE times Fed has cut: Sept 2024, Sept 2025, Oct 2025.
When Negative Vanna Will Matter
Here is the quant perspective shared by Jason in our member slack workspace volland-dealer-positioning. We need an actual catalyst as fuel for negative vanna dealer positioning and FOMC is a good one followed by BOJ and NFP the following week.
Jason Dec 3rd:
“This week’s vanna, which is relatively muted, looks like the upside is topped at 6875-6885 while the downside can get as low as 6770-6780. That is a bit of a range and in the interim, we can see swift, acute moves. This sets up a possible downturn from the higher order vanna that we have been seeing for several weeks now. But because IV will remain sticky until after the FOMC meeting, we won’t realize that negative vanna until the actual catalyst.”
Dec 4th:
“There is still dramatic negative vanna for Dec. opex being held up by event vol. This is going to get a bit dicey, and the rug can get pulled at any time. IV doesn’t have a lot of room to drop, especially with a still uncertain FOMC and BoJ on deck. If IV doesn’t drop, there isn’t any juice to run to the upside and overcome those resistances for tomorrow and Friday’s expiration.
I know I have been saying this refrain for a little while now, but the real key is to be prepared. I think when downside comes, it will be dramatic.”
Dec 5th:
“It was another day of vol crush, dropping VIX to 15.75. We were as high as 18 at the beginning of the week, making this drop significant pre-FOMC. Last opex, VIX was as high as 28 and that was only 2 weeks ago. So this is a major vol crush, but every day has been undervixed. In this negative vanna environment, significant undervixing is the only way markets can advance this strongly. That strength is waning, however. What will happen when markets start adhering closely to spot-vol correlation?”
Updated Wonky Rate Differential Intermarket Tell
Lastly, my Nov 25th rate differential bullish intermarket read was for market to rise from the smaller inverse Head & Shoulders pattern (in green) into the larger H&S pattern (in red). We are there. Once it reverses lower, so too will markets. And given there isn’t much support below 6750 SPX, the move lower into 6650 could be brisk.