VIX lows pointing to imminent correction in US equities of 3-5%

COMPLACENCY continues to prevail in the market as reflected by the CBOE's Volatility Index (VIX). The VIX recently touched a decade low of 8.84, a level not seen since 2006, just before the global financial crisis. The VIX measures the implied volatility of the S&P 500 Index options. It is also known as the Fear Index and has an inverse correlation to the S&P 500 Index.

Despite the index's massive spike of 47 per cent to a high of 17.3 on Aug 10, 2017 due to the war scare in the Korea Peninsula, the fear trade simmered down as the VIX collapsed back to the complacent low teens. Nothing much has changed regarding the ongoing conflict between North Korea and the United States, but yet the market seems convinced that all is well with no need for any protection.

However, the Commitment of Traders (COT) report by the Commodity Futures Trading Commission (CFTC) confirms the complacent narrative with the non-commercial short contracts entering into record extreme highs. Non-commercial positions are contracts held by large speculators, typically hedge funds for speculation purposes. History has proven that large speculators tend to get it badly wrong when they are all heavily in the same camp. In other words, the hedge funds are heavily long the US equity market due to the negative correlation to the VIX.