It's All One Big Trade

According to some folks I speak to in the institutional trenches, apparently the "low volatility" melt-up trade has seen quite a few shops, who previously had not dabbled in volatility, pile into selling it for a good while now. Part of that trade has enabled a nonstop rally in the mega cap techs, namely the "Mag7" leaders, alongside semiconductors and a few others like ANF COST. To round out that risk, quite a few of those folks were short the small caps. 

Since last Thursday, however, we have seen some serious signs that this trade is beginning to display cracks. The IWM (ETF for the small caps in the Russell 2000 Index) has been surging on a historical level, if you measure the sigma of the move. And now today we have the Nasdaq and semis coming in hard as volatility finally pops amid seasonally actually turning more favorable for the VIX. 

While it is certainly true that we have been here before, with the potential for a larger pullback in the Nasdaq which never materialized, as we head into this earnings season with Netflix kicking off the leadership reports tomorrow evening I do want to remind you of an old timer's stock market expression: "It's all one big trade."

In fact, that was the takeaway message from the 1987 crash, as a documentary I viewed put it. When we are in the midst of a real-time market, it can be rather easy to dismiss historical comparisons as being obsolete. After all, markets are always becoming more efficient, right? 

Well, I am not so sure about that, especially this market given how bifurcated it became. 

What that means, specifically, is that as a bifurcated market begins to finally unwind it is often not a smooth transition at all. In fact it can be quite violent. Into the end of July and early-August, I am reminded of 2011 as a time when markets are capable of surprising with volatility this time of year. 

Either way, it is not likely a coincidence that we first had the short IWM trade unwind over the last week and are now seeing the long QQQ/long SMH trade finally come under some type of pressure--The two are indeed related and may cause further unwinding yet.