VIX Breaks Above Crucial Technical Level; FX, Rates Vol Spikes

This could be a problem...

2018 has seen a strange phenomenon of rising VIX and rising stocks (which until the last few days was driven by a panic-buying euphoria in calls - bidding volatility up for upside enthusiasm, not downside protection)

 

But the last two days have seen VIX spike dramatically as downside protection is suddenly bid...

 

And that has smashed VIX above its two-year downtrend...

As CitiFX Technicals group warns:

 "We are now closely watching the combined larger double bottom neckline (14.5-14.6%) as a break of this, if seen, would suggest the potential for extended gains towards 20%."

But it"s not just Equity risk, volatility is spiking in FX and interest rates...

 

And most worryingly, credit has yet to react to this sudden surge in volatility... and a spike in HY to 360bps could seriously spoil the party...

As we noted Friday,"BofAML Bull & Bear indicator has given 11 sell signals since 2002; hit ratio = 11/11; "

What happens next? Well, once hit, the average equity peak-to-trough drop following 3 months = 12% (backtested, Table 1); note the last Bull & Bear indicator flashed was a buy signal of 0 on Feb 11th 2016.

Putting it all together, BofA warns that a "tactical S&P500 pullback to 2686 in Feb/Mar now very likely."

And here is what can spark it:

"The Art of Falling Apart: US dollar key catalyst; note US-Europe FX spat sparked ’87 crash; higher US$ “pain trade” = risk-off coming weeks; we reiterate 2018 calls: Big Long = Vol, Big Short = Credit, Big Risk = Equity Bubble (driven by $10.3tn of negatively yielding debt), Big Rotation from Davos Man to Joe-Six Pack portfolio"

Will this time finally be the charm for BofA"s recurring warnings of an imminent market plunge? The next 2 months will reveal if - this time - it was finally right...

The S&P 500 appears to be heading towards its first 1% drop in 112 trading days

As Nomura"s Cross-Asset Strategy MD Charlie McElligott noted:

VOLATILITY AWAKENS AHEAD OF EARNINGS, BUT CROWDING AND ‘SHORT VOL’ OFF A LOW-BASE TO BLAME AS WELL: But the larger story to me yesterday was the move in SPX implied vols, ESPECIALLY focused in the CROWDED large cap Tech / Cons Disc / Healthcare spaces, with key names reporting in the next week +.  An uptick in vols ahead of earnings should be expected of course…but off such a low base (too low), it felt ‘thunderous.’   The VIX outperformance was so large relative to the S&P move that we would have expected SPX closer to the 2805 level.

Regardless, the outsized vol move (and its impact on the VIX future) forced a rebalancing from the exchange traded notes universe to the scale of $3B of SPX futures delta for sale // equivalent of 46k VIX futs to buy.  Remember: the current scale of the vol short (outright) sits near all-time highs, while the NET vol short IS at all-time highs.