First Word

FLASH INTRADAY: GME surge --> VIX surge --> de-grossing --> stocks go down

STRATEGY: GME surge –> VIX surge –> de-grossing –> stocks go down
Equities are under intensifying pressure today, and investors are citing multiple factors including rising rates (10Y creeping up).  But in a way, we think today is actually a “de-grossing event”

– GME shares surged late Wednesday (+100%) and are again surging +80% today
– VIX has followed the price of GME shares very closely since mid-Jan (when GME went mental)

Why?
– GME might still a popular short among HF
– surging GME, means VAR requires short-covering
– going long VIX is not a bad proxy
– rising VIX causes value-at-risk models to require hedge funds to de-gross, or reduce leverage

Hence, GME surge –> VIX surge –> de-grossing –> stocks go down

Of course, this is merely an observation and may not be the actual mechanism.  But at a time when:

– crowded longs like Technology, Stay-at-home, etc have been acting poorly. 
– crowded underweights/shorts like Energy/Epicenter are surging

It is also not surprising to see GME create another wave of panic/ post-traumatic de-gross.

FLASH INTRADAY: GME surge --> VIX surge --> de-grossing --> stocks go down

Source: Fundstrat and Bloomberg


STRATEGY: Well, VIX surges are temporary equity headwinds, since economic momentum is strengthening…
The surge in the VIX is not welcome and rising VIX is a headwind for stocks.  But do we see this as directionally signaling new lows?  Given how cautious our clients have been (not ebullient), coupled with many “top callers”, coupled with improving economic visibility, we think this will prove to be a “rotational” event:

– emerging from this weakness is the continued resurgence of cyclical stocks aka Epicenter
– crowded and tired longs in Growth are likely source of funds

More from the author

Disclosures (show)

Stay up to date with the latest articles and business updates. Subscribe to our newsletter

Articles Read 1/2

🎁 Unlock 1 extra article by joining our Community!

Stay up to date with the latest articles. You’ll even get special recommendations weekly.

Already have an account? Sign In

Want to receive Regular Market Updates to your Inbox?

I am your default error :)