U.S. stocks, VIX dance in tandem in break with history; Risk On Trade Correlation Between Bitcoin And Wall Street’s Fear Index Raises Alarm Bells; Frenzied Feast of Bullish Buyers Puts Risk Market in Danger Zone

Jan 29, 2018

Lead Stories

U.S. stocks, VIX dance in tandem in break with history
Saqib Iqbal Ahmed – Reuters
A rising U.S. stock market normally reduces fear among investors, but the blistering pace of the current rally has instead also driven up the anxiety factor in the market.
The S&P 500 Index and the Cboe Volatility Index, which is the main gauge for measuring investor fears that benchmark stocks will drop in the near term, have moved in rare tandem form.

****SD: As of this writing VIX is around 13 and the S&P 500 is down about .3 percent.

Risk On Trade Correlation Between Bitcoin And Wall Street’s Fear Index Raises Alarm Bells
Chuck Jones – Forbes
Deutsche Bank’s Global Financial Strategist, Masao Muraki, published a report showing how Bitcoin’s price is inversely related to the Chicago Board of Exchange’s VIX index (nicknamed the Fear Index). The VIX uses options to calculate near term volatility for the S&P 500 and is a good gauge of investor sentiment.

Frenzied Feast of Bullish Buyers Puts Risk Market in Danger Zone
Sid Verma and Dani Burger – Bloomberg
Record bullish positions are building up across currency, equity and commodity markets as hedge funds and real-money investors dump the dollar and U.S. Treasuries to crowd into risk assets around the world.
Goldman Sachs warns that “extreme” sentiment is propelling global shares to their best start to a year ever, while U.S. government bonds head for their worst on record. Investors are throwing caution to wind to wager more gains are nigh. Those piling into same-way bets are causing some to warn that markets are dangerously close to overextended.

Will A Correction Be in Our Future? Of course it will, But…
Bob Lang – Cboe Blogs
Could a market correction be underway soon? Perhaps, but I’m not going to predict when it will occur. During the World Economic Forum in Davos I heard a normally cautious hedge fund manager Ray Dalio (Bridgewater Associates) tell viewers, investors will feel really stupid being in cash. After hearing this, I thought for sure the markets would crumble (my contrarian nature). Yet, the opposite occurred, and buyers went on a binge.

***SD: Goldman Sachs sees ‘high probability’ of a stock market correction

Derivatives costly and ineffective: Research
Karren Vergara – Financial Standard
Milliman head of fund advisory services Michael Armitage said more than half (53%) of super funds believe the cost of using derivatives for downside risk management and tail-risk hedging was too high.
“Fees can have a compounding impact on long-term returns. However, the real question is whether they provide a greater benefit than their cost. This can only be judged through the prism of members’ goals, which is shaped by super’s underlying purpose,” he said.

VIX Options and Futures Weekend Review for January 27 2018
Russell Rhoads – Cboe Blogs
VIX was lower last week, but that’s the only thing that lost value on the table / term structure chart below. All the futures moved higher despite VIX moving lower, but also shaking off a very bullish week for the S&P 500. We live in unusual times and there is much being written about the VIX behavior which seems to be ignoring record S&P 500 moves. Usually this disconnect rights itself with either stock prices dropping or VIX finally giving into the reality of a higher S&P 500.

****JB: Also see Volatility Indexes and ETPs Weekend Review for January 27 2018 and Russell 2000 Options and Volatility Review for January 27 2018

Things That Go Bump In The Night; In investment and allocation circles, we have a name for these magical protections against spooky market forces that go bump in the night. We call them hedges
Salient Partners via ValueWalk
Like many children with over-developed imaginations, I was always scared of things that go bump in the night. To this day I remember vividly the events (all fictional, of course) that frightened me so badly, like this scene from the 1979 made-for-TV movie of Stephen King’s Salem’s Lot, where little vampirized Danny tries to get his friend to open the upstairs window and let him in. You see, vampires have to be invited into your house. You have to give them permission to destroy you.
Hold that thought.

Exchanges and Clearing

Mini-SPX Index (XSP) Wednesday-Expiring Weekly Options Are Launching on Jan. 30
Matt Moran – Cboe Blog
A recent Cboe Notice stated that Cboe Exchange plans to list Wednesday-expiring weekly options on the Cboe Mini-SPX Index (XSP), beginning January 30, 2018. Cboe’s new XSP Wednesday-expiring Weeklys offer the features of S&P 500 Index (SPX) Weeklys options, but at 1/10th the contract size. The initial expirations for the new XSP Wednesday-expiring Weeklys are planned for February 7, 2018, February 14, 2018, and February 21, 2018. Going forward, new expirations will typically be listed on a Tuesday at least one week prior to expiration.

Regulation & Enforcement

U.S. authorities due to make arrests in futures ‘spoofing’ probe: sources
Michelle Price – Reuters
U.S. authorities were set to arrest several people on Monday in connection with a federal investigation into so-called spoofing and manipulation in the U.S. futures market by three European banks, three people with direct knowledge of the matter told Reuters.

****SD: Futures are the common ones, but options spoofing cases have happened. In December 2015, three Chicago-based traders “engaged in manipulative trading known as ‘spoofing’ to generate liquidity rebates from an options exchange.”

Chasing Time: The Hidden Challenge and Overlooked Benefit of Time Synchronization
Terry Roche – TabbFORUM
New regulations, ranging from MiFID II in Europe to the Consolidated Audit Trail in the US, mandate that reportable events must be timestamped to much more accurate levels than ever before. While compliance may be more challenging than it appears, however, effective time synchronization will enable firms of all types to obtain a better understanding of their trading environments – not only for regulatory reporting, but to model the market with reliable precision in pursuit of alpha.

Exchanges are Bitcoin’s Weakest Link…and Regulators are Watching
Avi Salzman – Barron’s
A gargantuan cryptocurrency theft has once again rattled the bitcoin market, and the odds of regulators getting involved are rising. On Friday, a hacker pilfered nearly $500 million worth of digital coins from Japanese exchange Coincheck. Regulators there said they’d now be conducting on-site inspections at exchanges, according to Bloomberg .

****SD: Bloomberg – Massive Cryptocurrency Heist Spurs Call for More Regulation and Crypto Investors Risk ‘Total Loss,’ Deutsche Warns

The get rich quick scams on Facebook and Twitter
Rob Goodman – The Sun
The Financial Conduct Authority found more than GBP87,000 was lost each day in 2017 through binary option scams

****SD: Included for some of the examples provided, which are so obviously shady it’s funny, and this factoid – “Brits under 25 were six times more likely to trust an offer about investments they see on social media compared to those over 55 – leaving them vulnerable to being scammed.”


Investors Are Betting on a Reversal in the VIX
Cecile Vannucci – Bloomberg
Some investors are preparing for a drop in the VIX after recent gains sent the index above its six-month average.

Apple and 4 other tech giants could spark a $181B shift in market cap
Heidi Chung – CNBC
As the busiest week for earnings begins, five tech giants reporting this week could cause a gain or reduction of $181 billion in value for investors.

****SD: Based upon implied move.

Higher Volatility Threatens The S&P 500: Important Levels To Monitor
Candy Matheson – Investing.com
In my 2017 Market Wrap-Up post, I referenced major support (200) and resistance (280) as levels worth monitoring on the SPX:VIX ratio, on a monthly timeframe.
The following updated monthly chart of the SPX:VIX ratio reveals a few interesting things:


34th Annual Cboe Risk Management Conference U.S. 2018
Cboe Global Markets, Inc. will host the 34th annual Cboe Risk Management Conference (RMC) U.S. from Wednesday, March 7 through Friday, March 9, 2018, at the Hyatt Regency Coconut Point in Bonita Springs, Florida.

****SD: I’ll throw this in from time to time as a reminder. On the other side of the peninsula the week before FIA Boca – about a two hour car drive from Bonita Springs to the Atlantic coast of Florida.


COT: Record longs in all major oil and product futures
Ole Hansen – TradingFloor.com
A full house of record longs in oil and products was the main feature in last week’s update on speculative positions held by hedge funds. The total net-long across 24 commodities rose by 3% with energy buying and short-covering in soybeans offsetting reductions elsewhere, not least in copper and sugar.

Interactive Brokers Draws Online Traders With Low Fees, Tech Prowess
Interactive Brokers (IBKR) is no stranger to the annual IBD Best Online Brokers survey. It popped into the five best brokers overall two years ago and returned this year, helped by its reputation for low-cost trading and technological prowess.

****SD: Options volume up 10 percent.

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