The VIX, Trump’s Pulp Fiction Moment, And The Triumph Of BTFD

We’re almost there, goddammit.

We’re just one decent session for risk away from erasing the entirety of the VIX spike that followed Trump’s Pulp Fiction moment:

As rapid as the “mean reversion” has been, it’s not quite as quick a snap back to “normalcy” as the vol. sellers and carry traders would ideally liked to see. And indeed, that underscores the fact that the angst stems from more than just one off-the-cuff comment from an increasingly unhinged President.

“Fire and fury” was just the straw that broke the back of a camel that was already weighed down by jitters about tax reform, the debt ceiling, and the already precarious geopolitical situation. Trump’s rhetoric (and the response it elicited from Kim) was just fuel on the fire (and fury).

Well anyway, for those interested, here’s some context from Bloomberg, who notes that “in each of the past six instances when the VIX rallied that much that quickly, the gauge plunged in the following month, slumping an average 27 percent.”

But the real punchline comes from the flows data, which shows that everyone was super-excited about selling vol. on Friday and throughout the week. Here’s Bloomberg again:

The $1.4 billion iPath VIX ETN (VXX) had an outflow of $69 million on Friday when VIX briefly touched the highest since November. Investors withdrew $237 million from the 2X-leveraged ProShares’s Ultra Short-Term Futures ETF (UVXY) last week, or 59% of its market cap, as the fund gained 45% over the five-day period.

As the mirror image, ProShares’ Short-VIX ETF (SVXY) saw $297 million inflows last week. The fund flows picture partly reflects dealers’ arbitraging activities when large price moves occurred. But it may also suggest the predominant sentiment that the VIX spike, driven by geopolitical risks, is more likely to be a blip than a fundamental shift to a high-vol regime.

Here’s the flows data for SVXY (daily in top pane, weekly on bottom):