Equity futures closed at their lows (after cash ended nearer its highs) amid deathly quiet volume with VIX at 6 week highs and HYG underperforming. Much was made Friday about the compression in VIX from its early spike highs – with those that have the microphones explaining how this must be a bullish sigh – surely, and that this also means the cliff resolution is merely hours away. Unfortunately, as we noted at the time, both VIX’s behavior (and the reality of our politicians) means that resolution is nowhere near (and the options market remains priced for more pain).
In fact the rolling of hedges in VIX futures (and Friday’s quad-witching) almost forced spot VIX to drop; today we see spot VIX rising (towards its now anchored January futures levels) and still pointing to significantly more ‘concerned’ pricing than the market would suggest. We go back to what we have been saying – managers know that selling down their exposure into this thin market creates a bid vacuum (a la Thursday’s flash-crash) and so bidding option protection is the only way to survive (meanwhile dribbling down the underlying exposure). During this holiday week, with its low volumes, it would surprise us to see VIX rising further as algos take advantage of low volumes to tickle stocks higher – but the vacuum underneath grows larger by the day.
