Nasdaq 100 Volatility, Largest Premium over the VIX Since 2004

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Tesla $TSLA Drawdowns Since 2013

Feb 2016 -48%
Dec 2013 -38%
Aprl 2015 -36%
May 2014 -32%
Dec 2016 -31%
July 2017 -15%


Nasdaq Volatility – Highest Since November, a Spectacular Divergence found in NDX vs S&P Realized Volatility

CBOE NDX Volatility Index vs VIX

This week, we’ve witnessed a strong correlation between Nasdaq and Rates (Treasuries). Keep in mind, this year the Nasdaq went up with U.S. government bonds as investors rotated from Trump trades into large capitalization growth stocks.  This Spring – as DC gridlock took hold – investors rushed into bonds and the Nasdaq 100.  Today, this rotation is now in full reverse mode.  See our The Bear Traps Report with Larry McDonald; Reflation Revival, Part I – June 21, 2017.  U.S. GDP and ISM data has come in above expectations.  At the same time, there is far more momentum in Washington than there was during the Comey (former FBI Director fired by President Trump) drama days of early May.  Over the last few weeks, the sell off in U.S. Treasuries and FAANG (Facebook, Apple, Amazon, Netflix, Google) equities has been spectacular.   Investors are rushing back into value stocks with energy names (XLE, XOP) up 7-9% from their recent lows.  Which begs the question, if oil (WTI) can make a move back up above $49 – where will Facebook FB trade?  $135?

In our view, the 2017 bond market rally – which saw yields plunge from 2.62% in December to 2.12% on June 26th – supported the equity market surge, especially in the Nasdaq NDX.   Going on the 9th year of the equity bull market, it’s clear to us the 2017 explosion higher in the Nasdaq 100 NDX had a lot to do with the plunge in long duration bond yields.  The recent reversal in this trend has been profound.

Volatility Suppression

We must remember, global equities are off to their best start since 1998  – calm waters are sucking a lot of people in to complacency.  Too many players are in the same trade selling volatility, they’re stepping in front of a steamroller – trying to pick up a $1 bill.   Over the years, time after time we’ve seen this trade print money for weeks on end – only to give it all back in a few days.  The VIX, also known as the CBOE Volatility Index has plunged 21% this year – its smallest quarterly average since in eleven years.  We’ve also seen the least amount of one-day* surges in any first half year going back as far as 2005.

*Moves greater than 10% in one trading day

S&P 500 Smallest 1st Half Drawdowns

1995: -1.7%
2017: -2.8%
1964: -3.1%
1954: -3.6%
1963: -3.6%
2015: -3.7%
1985: -3.7%
1989: -4.2%
1961: -4.3%

Schaeffer’s Research

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Nasdaq 100 Volatility Premium over the S&P 500 VIX

NDX over VIX

You have to go back to 2004 to find this large a volatility premium.  Forty one stocks in the Nasdaq 100 NDX are up 30% or more in the first half of 2017, today’s volatility premium is spectacular.  As we start Q3, growth continues to lose leadership.   There’s a powerful growth to value rotation developing as the “reflation trade” has stormed back to life.   Looking at returns, the Nasdaq 100 futures vs S&P contract are near a ten week low.   This is a large problem for hedge fund positioning.

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Reflation Revival, Why is Wheat Trading like Tesla Equity?

Nas CRBIn Reflation Trade Revival mode, wheat is trading like Tesla equity.  The September wheat futures contract (MWU7) is up 50% since May 15th, 2017.   Energy stocks are as under-owned as any sector in the last decade relative to growth.  As a result, we’re seeing a colossal sector rotation back into value names (commodity sector equities) as cash hemorrhaging out of big tech (FAANG stocks).

As investors pile out of crowded tech trades – positioning risk is HIGHLY elevated at quarter-end when allocators tend to rebalance.  In the first twenty days of a new quarter, positioning alpha is 10x higher than average.  In other words, getting out in front of the rotation is more important than valuation – as capital flows out of highly concentrated trades it has to go somewhere in a bull market.  It’s a growth into value tsunami.

Reflation Revival: Rates, this Sell off in Bonds is a Beauty

10 Year U.S. Treasuries

21bps in the last five trading days, 2.13 to 2.34%
31 bps: Feb 26 – Mar 13: 2.31 to 2.62%
58 bps: Nov 4 – Nov 18: 1.77% to 2.35%

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