The Quants are in charge - A massive barn burner of a rally triggered by mechanical flows, volatility reset and momentum. The systematics led rally could continue as long as the VIX stays stable.
A massive barn burner of a rally triggered by mechanical flows, volatility reset and momentum. The face ripping rally, which started from yesterday’s lows after rumors, and news of a possible cease-fire started spreading out was largely driven by computerized trading. The VIX (volatility index) trading universe, which uses the VIX index and VVIX, (a derivative of the VIX) as a trigger to trade, led the market rip strongly to the upside this morning. It started with the VIX topping out at 28 yesterday and in a short 24 hours has fallen to 21, a huge drop of 25%!
During the last two weeks of the Iran war, systematics (a broad cohort of computerized and algorithmic traders) were forced to cut exposures to equities. When the sudden cease fire was announced, they had to reverse positions, cut their losses and rush to the exits to avoid missing out on a rally. Remember this kind of trading is not decided by analysts - pre-set rules and conditions trigger trades in nano seconds. Simply, they had to re-leverage.
On Nomura’s estimates, trend followers could add $20 billion of equity longs based on the mid-week surge in global shares and, as the bank’s Charlie McElligott wrote, even a move back into “just a ’20 iVol’ world would see vol target overlays reallocating into equities. Mechanical forces in the equities vol market can’t have a view on ceasefire ‘winners’ and ‘losers,'” McElligott reminded investors. They “have to trade” the knock-on effect as downside hedges go OTM (Out of The Money.
For the short-term, expect this rally to continue if the VIX stays relatively muted, which could be punitive for heavy macro - doomers and systematic shorts, as the volumes have been tremendous on the buy side / upswing.
