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Tyler Durden's picture


There were some readers who took offense at our "bloodbath" recap of yesterday's market action (modestly different from that provided by MarketWatch). And, all else equal, a modest 28 step drop in the E-Mini/SPX would hardly be earthshattering. However, all else was not equal, and based on peripheral facts, the reason for our qualifier is that as of last week virtually nobody was prepared for a move as violent and sharp as the one experienced in the last minutes of trading yesterday. In such a context a "mere" 1.5% drop in the futures market has a far more pronounced impact on participants than a 10% or even 5% drop would have had, had traders been positioned appropriately. They weren't. So what was the context? Let's find out.


As noted previously this happened just as the net long positioning of specs soared to an all time high.

In short - the "sidelines" speculator money is already all in, and is using gobs of leverage.

Second, when it comes to high beta, or traditionally the most volatile stocks, those that serves as either leaders or laggards in the market in its year end phases, we take a look at the Russell 2000 Mini speculative exposure as shown by the CFTC's weekly Commitment of Traders update. The chart below needs no explanation: the net non-commercial spec longs in the Russell 2000 have never been more bullish. If the market, which is priced to absolute levered perfection disappoints, the high beta exposure will be annihilated.

Third, and last, for all those who have had a sinking feeling ever since June that something was even more broken with the equity market, more so than usual, we have just one chart to prove all of them right. As this chart of net non-commercial CoT VIX exposure shows, starting in June and continuing ever since, the net exposure in VIX futures has gone down in what is virtually a straight line.

But what changed in June? Well, as some may recall, something very substantial - the head of the Fed's Markets Group, i.e., its trading desk, got a new head: one who has been rumored to have a different PPT style to his predecessor Brian Sack - a style that involves the relentless selling of VIX to take advantage of a market which is drowning in reflexivity, and in which the movement of the vol surface has a far greater impact on the underlying asset than any fundamentals or news flow: want to send the market higher (and have an infinite balance sheet at JV partner Citadel courtesy of your backstop, then just sell, sell, sell VIX).

At least we can now scrap the "rumored" part.

* * *

So to all those who are confused why a 1.5% drop in the market constitutes a bloodbath, now you know: with no hedges on, with massive margin exposure on, and with everyone all in, the last thing the market can sustain is selling, any selling, or else the dreaded margin calls start coming in and PMs have to satisfy margin insufficiency with more selling, setting of an avalanche of even more selling, which ends where, nobody knows. In fact one can argue that in this context a modest 1.5% drop may have a greater impact on sentiment and positioning than a whopping 10% drop did as recently as 2008 when everyone was more or less positioned to expect precisely such a thing. Because if one is 99% levered, a 1.5% move lower just wiped out all equity.

But hey: a few more percent and one can be certain that Wall Street's unofficial branch of government, the Fed, will get a solemn request by such representatives of "the people" as Chuck Schumer to "get to printwork" as soon as possible...


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Sat, 12/29/2012 - 16:32 | 3105107 LiesAreTheOnlyTruth
LiesAreTheOnlyTruth's picture

We're not "all in" until the Fed says we are.

With unlimited buying power, unlimited ability to create money, invisible mandate to "exchange other instruments than debt as deemed necessary", no accoutability, no oversight, no disclosure, no transparency ... the Fed can print us to $60 Trillion ('off balance sheet') and just own the market.

THAT ... is what I call ALL in ... when they own everything in the US market float, or just 90% of it ... THEN we're talking DOW 70,000, NAS 40,000 and SP 20,000!

Give it a couple years, short margins will be increased by ten times, no shorts will exist.  Long margins will be reduced to 10% of equity, longs will exlode.  Then, the float reduced by 90% means the remaining trading shares out there will skyrocket!

"The Fed Say ... DOW 100 K!"  T-shirts now available!

Sat, 12/29/2012 - 17:48 | 3105301 horseman
horseman's picture

I know this much from personal experience, everytime ZH says the market is going down hard, I short it and immediately lose my money the next trading day when the market goes up.

Sat, 12/29/2012 - 20:48 | 3105632 JuicedGamma
JuicedGamma's picture

Monday all in brother.   Now you've found your signal trade that bitch!

Mon, 12/31/2012 - 10:48 | 3108813 horseman
horseman's picture

On Fri I went long when the SP was at 1407-1408.  We will see.

Sat, 12/29/2012 - 19:33 | 3105493 monogratis
monogratis's picture

The interesting thing is, whenever a bearish sentiment develops for gold and silver, they mysteriously make a large move upward.  Why ?  Of course, it has to do with the fact that in the physical market there are essentially only producers and buyers.  There are no large sellers of above ground silver stocks.  Above ground silver stocks don't exist anymore.  The fundamentals for silver are so obscenely bullish that people lose perspective easily.  There is lots of silver available on the planet, but not for $30 an ounce.

Sat, 12/29/2012 - 20:15 | 3105560 Room 101
Room 101's picture

Love ya Tyler, but the article the other night was a load of crap and this is just more doubling down on bullshit.  A 1.5% drop is a 1.5% drop.  It's statistical noise in the grand scheme.  Any fool that is leveraged to the extent that this sort of market movement is going to kill them is playing russian roulette with a semi-auto anyway.  

Oh and while you're at it, would you mind posting a thread every now and then where those of us who don't plan on slashing our wrists anytime soon can exchange tips information we can use to act in a positive manner?  "Stack iPMs, bitchez" is entertaining but not very useful.  Knowing where the best deal on PMs are...that's more practical.

I promise I'll even post a link to a deal on razor blades for those are in need.   


Sun, 12/30/2012 - 03:00 | 3106102 MrButtoMcFarty
MrButtoMcFarty's picture

I know since I started shaving using a bit of olive oil my razors last longer and my skin is as smooth as Berlusconi's latest girlfriend.....highly recommended!


I buy most of my silver in junk coins at spot from local pawn shops...nobody responds to CL wanted ads anymore. Gainesville for the Au.



Sun, 12/30/2012 - 08:59 | 3106204 Room 101
Room 101's picture

Thanks for the Gainesville coin info.  Shipping seems to be the big cost difference between sources.  

LOL!  I intended the razor aside as a poke toward the Heaven's Gate devotees here at ZH. 

But I'll try the olive oil.  In order to preserve them you can also dry them and dip them in isopropyl alcohol after each use.  It's the water that degrades the steel.  

Sat, 12/29/2012 - 21:10 | 3105691 1eyedman
1eyedman's picture

If "no one" was prepared.....who has bid up prices
Of spy puts so much?? They are prepared to
Win both ways while scaring congress into more
Deficit spending and fin system crack

Sat, 12/29/2012 - 21:58 | 3105761 MyBrothersKeeper
MyBrothersKeeper's picture

Good info.  The problem is that the politicians know everything stated in the article.  They don't understand it for sure, but they have enough bankers in their ear to tell them "fix it at all costs" or amegedeon will ensue.  In reality, it doesn't mean fix it, it just means "make people believe it is fixed" to continue the supression of volatllity.

In my opinion, what happened in June was just an election season decision to go "all in" on completely supressing volatlity.  That's when you started seeing government statistics start to diverge farther and farther from reality.  That any bad news was trumped by good news...mostly in the form of skewed statistics and promises to inject more stimulus both here and abroad.  Emphasize the things getting better (even if they are not really getting better) or crisis averted (Europe) and away from anything perceived as negative or not "under control"  What did it take for the Vix to spike in Aug/Sept 2011?  Unexpected happenings that the government spin machines could not control:  US debt downgrade, spiking yields in Europe in Spain and Italy.  But the politicians are learning and evolving as to control most events that lead to confidence failures.  What caused the spike in Vix last 2 weeks:  same thing....unexpected events as most everyone believed the fiscal cliff issue was resolved. And why was the fiscal cliff not resolved? In my opinion, the deal that will be struck in the next 72 hours is no different than the deal that could have been struck 6 months ago.  The difference is the government and select individuals will be able to profit on both the dip and the surge back up.  Most of the Vix spike occurred after hours.  WHy in the world would Obama wait to hold his presser after the market closed if he really wanted to scare people?  Because he knew the after hours spike would do the trick and as long as it is fixed by Monday the Vix will return to suppression mode. The fly in the ointment will be making sure there are enough votes in the house to pass whatever comes out of the senate. If it comes from the Senate most Dems will vote for it and then they need enough "save my skin" republicans to ram it through.

A few honest politicians will certainly not get in the way of the agenda of a few and their puppetmasters. This whole tax sham is just another way of holding up a baby (taxing middle class) to protect themselves from shouldering any blame for not addressing the real issue of long term economic stability.  That is why I still say the battle royale is the debt ceiling debate as there will be no babies to hold up  and say "why would you want to hurt this poor little fellow with your selfishness?" The baby they hold up for the sequestration debate will be "national security"....which is why I think the politicians will try to tie the sequestration cuts to the debt ceiling just like they have tried to tie the debt ceiling to the fiscal cliff.  As long as they have a baby to hold up they can sway public opinion.  If the true conservatives in Congress want to get the country back on track they need to make sure the debt ceiling debate stands by itself as most Americans know that spending is out of control....but it must be isolated. Make them force Obama to use the obscure interpratation to raise the debt ceiling himself.  Then he will own it and continue to do so...or make real cuts and not promises.

So I respectfully disagree.  Even though the happenings over the last week did nothing more than dip the markets 2%, they are not going to let us go 72 hours without passing something meaningless that will calm nerves and restore confidence.  In this round, the profits they make from the dip and revamp won't be nearly as fruitful as it was in fall 2011....but it's easy come easy go when you have nothing to lose and everything to gain.  They will just make more in the next round. And on and on until the black swan emerges and the central planners become powerless to make people believe they have it all under control.

Sat, 12/29/2012 - 22:23 | 3105806 Missiondweller
Missiondweller's picture

Great analysis ZH. That's why I love thise site.

Sat, 12/29/2012 - 23:24 | 3105917 Remington IV
Remington IV's picture


Sun, 12/30/2012 - 00:24 | 3105992 Tom Green Swedish
Tom Green Swedish's picture

Another market crash coming?  I'd say it's in the cards.  Tax increases lead to market crashes. Margins debts are soaring. Time to bail. Gold and silver will probably not be safe, went nowhere during the Lehman crisis, just like everything else.   This time it's different, its the only thing that people will be able to sell. I think I'm right here, it has went way too high. The thing is the only thing that is really safe is bonds when the market tanks, everything is a commodity in the stock market.  No value assigned to anything.  Did these PM people really think they are going to get a free ride just for buying into the hype of this metal? Gold costs 400 an ounce to mine out of the ground. But I think it will be a good thing. 


Maybe people will start using their money to actually invest in things other than financial instruments. I could seriously spend my money better than some of the companies out there.  They are in a hoarding cash no hiring mode, no creation mode and it really sucks. 


Look at Apple the demon. They are the biggest example of cash hoarding going to waste in the world. Please tell me what the hell do they need to sit on 30 billion dollars for.




Silver goes under 28 watch it go to 24 or lower

Gold goes under 1600 watch it go to 1450 range possibly lower

Sun, 12/30/2012 - 01:18 | 3106047 Joe moneybags
Joe moneybags's picture

-1 for the grammar "it has went".  I can tell that you are a native speaker.  Second-language English users always know how to conjugate "go-went-gone".

Sun, 12/30/2012 - 03:04 | 3106103 Lordflin
Lordflin's picture

Gold costs only 400 dollars an ounce to mine... Wow, ok... Now I understand why mining stocks have taken off the way they have...

Sun, 12/30/2012 - 00:34 | 3106008 resurger
resurger's picture

i knew since that piece of sht joined the PPT VIX and VXX were seriously broken.

Sun, 12/30/2012 - 07:30 | 3106165 Aurora Ex Machina
Aurora Ex Machina's picture

Am I being too naive to assume that if that 1.5% became 10%, then a "rogue algo" would be triggered and the market would simply be halted?

Someone explain why the current market doesn't have a F5 / F9 quicksave feature already built in, please? As far as I've understood it (and I freely admit: this could be very wrong), the structural setup isn't anything like 2008, as everyone knows the two rules:

1) Margin calls don't matter because the FED is back-stopping it all (and is providing a hyperthetical $85 bil / month to make sure of this; and no, that's not a spelling mistake)

2) As long as things look green, then liquidity / actual volume doesn't matter, as no-one wants a repeat of 2008, and it won't be allowed this time (see #1)


Rather than simply junking, a real explanation would be nice (given that the amount of raw dollars now held by most major US Corporations is also at record levels, their own insurance?). Over the last year, we've seen that profit warnings make stocks rise; quarterly results that show slacking sales make stocks rise; main street reporting major down-turns / firesales / receiverships makes stocks rise; Samsung / Google / Android [etc] beating the crap out of Apple's market share makes stock rise; Baltic Dry at under 1k, close to 2008 levels in Q4 of 2012 makes stock rise, and so on and so forth.

Play a game - add in your own counter-factuals with the tag #MakingSureStocksRise


At this point, we all know we're down the rabbit-hole, so fundamentals don't seem to be useful; it's all about holding the line [1] [alternative Patriot version for the 'traditional' readers here; plus points if you get the meta-joke]. I'm happy for someone to point out what I've missed.



[1] With a nice slice of large pink moon in the frame

Sun, 12/30/2012 - 10:10 | 3106269 d edwards
d edwards's picture

All of this with declining volume, can't end well.

Sun, 12/30/2012 - 10:10 | 3106270 d edwards
d edwards's picture

All of this with declining volume, can't end well.

Sun, 12/30/2012 - 15:23 | 3106949 What is The Hedge
What is The Hedge's picture

Have not read, here, a single mention of the word: Minsky. Why? I keep reading posts here about how 1.5% is insignificant. How can that be in a crazily leveraged market?

Mon, 12/31/2012 - 10:36 | 3108766 AlphaHunter001
AlphaHunter001's picture


"speculator money is already all in" - this also applies to gold


look at the COT report, large traders are holding near record amounts and gold is going down... that means that the sellers in the market are massive and far outweight the level of supply that buyers can handle... commercial traders continue to sell forward gold, locking in these high prices... gold might get one more push up, and then its setting up for a large fall

Tue, 01/01/2013 - 00:38 | 3111549 Lordflin
Lordflin's picture

Exactly where do you think gold has to fall? The physical market has all but dried up... Again... Hold onto your paper... I will be the sucker holding the bag of coins... You be the cheshire cat with the big grin asleep atop your pile of fiat...
