Things are heating up underneath the surface

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Updated: 21 February 2020

General markets have been very calm recently, but that is only valid if you look on the broad market. SPX has done very little, but we have had some big moves in both equity related sectors as well as some major moves in popular trades. Below is a chart of the US minimum volatility ETF, USMV. This has been a stellar performer year to date, but positioning is extremely long in this space.

The trend is still intact, but when minimum volatility starts to move, you better pay attention.

US minimum volatility etf

US 10-year yield surged today. Just as I have been outlining recently, US yields has become a way too uniform “one way” trade. Most investors still believe yields are going one way only, lower. Positioning in this space is extreme and any bounces will be magnified due to leveraged positioning. We are witnessing this right now. 1.80% is the first bigger resistance but given the extreme positioning you should not be surprised by overshooting moves.

US 10 year yields

Gold is a derivative of yields; especially given the fact the narrative has been so strong lately. People have poured in longs in gold, but many times without a plan. The fundamental reasons for gold longs remains the same, but things are not static, and assets move, something that most gold bugs refuse understanding.

It took a small pop higher in yields to take gold violently lower over past four sessions. Note that gold is closing below the step trend line. Not great news for the “new fundamental gold long” investors.

Gold Chart

It is interesting to see so many sectors and assets moving wildly, but the SPX staying very calm. Whenever things start moving on a grand scale, like we have seen over past 48 hours, it sure pays to look beyond the “simple” index view. SPX is not doing much, but with so much going on underneath the surface, and VIX trading calm as well, I advise one should start monitoring VIX and look for possible long volatility plays.

Below is a chart of VIX (doing little) versus Bond volatility. Note that bond volatility has been early in leading the VIX on several occasions this year. VIX is not overly cheap if you look at the SPX index moves only, but it is worth observing for possible global macro hedges.

VIX vs Bonds Chart