SPX Delta Hedge Squeeze

There is speculation that a quant fund was short a massive amount of SPX Feb calls with a strike of 2300, leading to a big blowup and short squeeze the past couple of days.  It is rumored to be this guy who blew up.

It is one thing to collect fat premiums shorting puts after a dip, it is totally a different thing to short cheap calls when the VIX is at 11, expecting a range bound market.  I can't think of a worse strategy than shorting calls in a bull market.

I believe that the skeptics that remain are those that are either 1. die hard contrarians who think bullish sentiment is a sell signal, or 2. those who just hate Trump and get emotional about the market being irrational.  At least with the first group, you get your share of wins when the trend tops out, but the second group are just those making subjective bets on what they think should happen, not objective bets on what is likely to happen.

According to Mark Hulbert's sentiment analysis of newsletter writers, the level of bullishness is actually rather mild considering that we are making new highs.  The wall of worry is still there, which is a bit shocking to me, considering how strong this rally has been since the election.

I do believe this Trump rally is a bubble, and irrational, but I also know that it's not a high probability trade to just short the market when it is making all time highs every day.

One little nugget that I will give to the bears is that the VIX went up yesterday along with the market.  This is a warning sign that the rally is getting frothy and entering its terminal stage.  Also, the bond market is showing some weakness, but not enough weakness yet to really make stock investors nervous.  If we do get above 2.60% 10 year yields, look for stocks to actually go lower on further bond weakness.  That positive correlation between stocks and bonds hasn't really been there on the downside since middle of 2015.

I am still not active yet on the short side.  I am definitely not participating on the long side, as I just can't get myself to buy into a blowoff move.  Yesterday's VIX action does have me more interested now in looking for a spot to short.  If we get further strength in VIX with a flat to up market, then we should be close to a short term top here.  Watch the VIX.