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This Was A Painful Week To Watch

The Heisenberg profile picture
The Heisenberg


  • If what happened during the week of February 5-9 was a technical, "one-off" bout of turmoil catalyzed by an anomalous vol. spike, this week was the opposite.
  • This week, markets were forced to ponder two extremely disconcerting possibilities.
  • The first is that Jerome Powell could well stumble (or be forced) into a policy mistake.
  • And the second was of course the Trump tariff announcement.

This was a tough week to suffer through for markets. I'd argue it was much more arduous psychologically than the week of February 5-9, when the short vol. trade blew up.

I've spent a lot of time here (and certainly elsewhere) explaining how the turmoil that swept across markets early last month was technical in nature and thus not necessarily indicative of any further near-term pain. That's not to say that the ubiquity of the short vol. trade doesn't pose further near-term risk (it does) and that's certainly not to say that the unwind in CTAs and the clearing of the proverbial deck in terms of the VIX ETP rebalance risk has definitively defused the multiple time bombs inherent in the proliferation of strategies that are implicitly or explicitly short vol. (it didn't). Rather, it's just to say that the events that transpired from February 5-9 did act as a kind of pressure valve that allowed some steam to escape.

As a reminder, here's what I mean when I say "the deck was cleared" in terms of the VIX ETP rebalance risk:


That's probably been rebuilt a bit, but the bottom line is that the risk posed by those products was pretty much zeroed out overnight on February 6 and since then, ProShares has changed the rules on the ProShares Short VIX Short-Term Futures ETF (SVXY) and the ProShares Ultra VIX Short-Term Futures ETF (UVXY), in an effort to make them less susceptible to a blow up and, more importantly for the broader market, less likely to catalyze another super-charged VIX spike. That rule change wiped out some options holders, something I believe is pretty egregious, but that's another story.

As far as CTAs (and other systematic strats) go, it was probably a good thing that they were forced to de-risk as

This article was written by

The Heisenberg profile picture
Perhaps more than any other time in the last six decades, the fate of markets is inextricably intertwined with the ebb and flow of geopolitics. It's become increasingly clear that one simply cannot fully comprehend market movements without a thorough understanding of concurrent political outcomes. Drawing on extensive experience in both politics and finance, Heisenberg will help demystify a world in which investors can no longer hope to conceptualize of markets as existing in anything that even approximates a vacuum.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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