Amid the carnage and chaos of the last two weeks, one thing has become crystal clear – the effect of massive one-way bets on ‘everything’, predicated on the omnipotence of central bankers, has left a market (stocks, bonds, FX, commodities) bereft of fundamental linkages and instead driven entirely by technicals (flows, forced unwinds, systematic gamma). While many ‘records’ were broken in terms of velocity of moves, it is the VIX complex that seems to have suffered most, and as the following chart shows, positioning is now at an extreme in both stocks, vol, and bonds once again.
Speculative traders have never – ever – been this net long VIX futures… and traders have not been this net short S&P futures since Summer 2012.
The VIX curve remains deeply inverted – the longest period of backwardation since 2011’s plunge.
And the crowd has ‘decided’ to pile into bond shorts – with 5Y Futures net shorts the largest in 7 years…
As is clear, the last time the crowd was this short, bonds ripped 250bps tighter, forcing a massive short squeeze.
With such extreme positioning across the equity, vol, and bond complex, it would seem no matter what The Fed does in September, there will be blood.