Fra Zerohedge:
It’s official – the “most-hated rally” is now the “most-loved stock market ever” as speculative positioning has never – ever – been more bullish…
Speculative bullish positions all added this week with VIX shorts and Dow longs now at all-time-record highs.. and Nasdaq longs soaring…
Furthermore, as Goldman Sachs notes, record S&P 500 call volumes post-Brexit point to an unprecedented rush for upside. In fact, five of the top ten highest SPX call volume days on record occurred post-Brexit… “We believe that many investors were “stopped into” the market during the equity rally and buying calls in order to rent rather than own the market.”
Goldman further notes that there is no election risk priced into the market – S&P 500 implied volatility is smooth and upward sloping showing no signs of excess hedging demand around the November 8 presidential election.
And VIX is unprecedentedly low for an election year…
Finally, we note that sentiment among the newsletter-sellers and financial twitterati has never been more bullish…
And so, given all of that, we think it is worth remembering JPMorgan’s quant guru Kolanovic’s recent conclusion:
As this collapse in realized volatility is not a fundamental change in volatility regime, we expect realized volatility to increase (this increase in market volatility is shaping to be a consensus view, as indicated by steep contango of VIX futures). Option exposures that are pressuring volatility should roll-off, and investors should increase leverage and set protection closer to the current market level. This will set the stage for a more rapid increase in volatility. We have seen these switches between extreme low and high volatility that manifest themselves as high volatility of volatility (e.g., note that that the current “once in 10,000 year” market calmness came after a Brexit day move that was “a once in 50,000 year” move for EuroStoxx 50 index).
Put another way – this can’t end well…
Whether central banks will respond with even more of the same to this upcoming “increase in volatility”, remains to be seen.
