More Flows Coming?

1.) FLOWS – They remain in control. Big money CTAs bought about $86BN of equities last week, about $45BN of which was in the US. That is meaningful flow. What’s next? It’s estimated that over the next 5 days another $69BN of buying is coming, about $37BN in US equities. Those are also significant numbers. What do we expect? Fairly quiet tape (lower volatility for now) and a steady grind higher. It just shows how powerful the flows from this group can be. What we haven’t seen much of yet is the “Risk Control” / “Volatility Control” style funds. Risk control hasn’t been a meaningful buyer yet due to elevated realized volatility. If the Rate of Change (RoC) of the move slows, risk control could step in and be net buyers, increasing those overall flows. It’s estimated there is potential buying of about $185BN over the next month…IF the S&P 500 averages +/-0.50% daily moves. Regardless, there is a decent amount of buying power in the system. It just needs certain conditions to get released.

2.) MOVE – The MOVE Index tracks bond market volatility. And while this is specific to the bond market, if bond volatility gets out of control, NO assets are happy. Stocks hate it when bond volatility lets loose. So what have we seen? In March, bond volatility surged from around 70 to 115 as the 10-year yield jumped from below 4% to 4.45%. During that same time (March), the S&P 500 dropped about -8%, and gold dropped about -24%...nothing is happy when bond volatility accelerates. But, since then, the 10-year has eased back to around 4.23%, while MOVE has fully reversed the spike now trading at 65. This marks one of the sharpest bond volatility resets we’ve seen.

3.) VIX – I’ve commented on how volatility is currently low at about 17.50 on the VIX. Will it stay there? Probably not. Why does something come down a lot? Because it went up a lot. Sounds terribly simple, right? Well, in vol space, that’s true. I discussed yesterday how volatility mean reverts. That’s what has been happening. But, at some point, it bounces as traders buy protection. Most of the time, that protection isn’t bought slowly before it is really needed. It’s bought in a more reactionary way. Market up, VIX down is what we want. Normal. VIX up, market up suggests protection is being accumulated. We haven’t seen that so far with the move off the March lows. But VIX is very oversold here. If it does spike, 20 would be a likely topping point, which really isn’t that high and would coincide with those CTA buys coming in, likely arresting any real drop in equities. Nevertheless, don’t be surprised if we get a bounce in VIX next week. Speaking of volatility, oil volatility (OVX) keeps dropping as well, now down to 73 from a high of 126. West Texas Intermediate (WTI) is now at $86, -7.3% so far today. It seems a “new round” of peace talks with Iran could happen as soon as this weekend. If those talks go well, don’t be surprised if oil opens up Monday down -10%.