U.S. stock market calm looks skin deep

<p>Investors have calmed considerably since their clear trepidation ahead of 8th November, and the intense but short-lived sell-off after Trump’s win. But there are signs that investor calm may not run so deep.</p>

U.S. investors are set to continue the remarkable rebound of risk seeking on Thursday, in the wake of Donald Trump’s election victory.

Stock futures are pointing higher after the biggest surge in Japan’s Nikkei in 9 months.

Swings of the VIX Volatility Index also typify the equities roundabout.

It careered 23% lower at one point on Wednesday, and was another 4% lower at the time of writing.

Investors have calmed considerably since their clear trepidation ahead of 8th November, and the intense but short-lived sell-off after Trump’s win.

 

But there are signs that investor calm may not run so deep.

 

A check of Wednesday’s tape a little into the session showed some 130,000 VIX puts traded vs. 229,000 calls, 3 and 4 times the seasonal average according to data from Trade Alert LLC.

Some of this influx fed an unmistakeable rise in bearish expectations into the year end and first few months of 2017.

At some 430,000 the count already dwarfs 250K outstanding late in December 2015.

Even excluding deep positioning with a pessimistic tinge in the rest November—2.3 million calls; 1.4 million puts—the closing days of the year skew unmistakeably bearish.

The last expiry of the year on Wednesday 21st December holds 1.3 million calls against 660,000 puts, with volume continuing to rise as I write.

Open interest is concentrated in Dec 21 calls—almost 800,000 bets eye VIX strikes between 20 and 30.

 

With the ‘fear gauge’ at 13.5 at the time of writing, call buyers are betting on a bounce of at least 48% by VIX futures sometime between now and 21st December.

 

Can you imagine the portentous note of tension this would strike over global stock markets?

It’s little surprise that investors took out more insurance against a market rout this December than in pre-Trump December 2015.

Also bear in mind that the VIX is neither a cause of volatility nor a good predictor of how long the craziness might last.

 

Still, brisk trade in market protection tells us that post-Trump calm masks lingering anxiety.

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