Steamrolled by Volatility

By Tim Taschler

On Dec. 4, 2017, I published a piece called “The Death of Volatility? ” At the time, the VIX (volatility index) was trading at around 11. The point of the article was that a lot of money (retail, professional and institutional) was shorting (selling) volatility in the belief that it was “easy money” because volatility has been falling for years. Typically, it’s a case of markets going up and volatility going down. But as I wrote in the Dec. 4 article, “the problem with picking up nickels in front of a steamroller is that complacency sets in, people stop bothering to even watch the steamroller, and a sudden shift in dynamics causes the steam roller to unpredictably speed up.” Last week the steamroller didn’t just pick up steam, it looked more like a runaway train, jumping over 350% in a couple of days.

Volatility Index (VIX), Source:, Feb. 9, 2018

Here is a look at one of many short volatility ETFs (SVXY) that people trade. Notice that it took over five years for this to climb from $8.36 to $138.21 (1,644%), but only five days to fall 93%.

ProShares Short VIX Short-Term Futures ETF (SVXY), Source:, Feb. 9, 2018

To quote the title of a CNBC special report, the markets have been “in turmoil.” The S&P 500 has traded down as much as 11.8% from its high to low with some wild overnight and intraday swings.

S&P 500 Large Cap Index (SPX) Source:, Feb. 9, 2018

The most recent cover of Barron’s (Feb. 10, 2018) warned readers about the coming volatility. Now? Something about barns and horses comes to mind.

Source: Barron’s, Feb. 10, 2018

Interesting data points leading into this volatility spike:

  • According to Eric Balchunas, Senior ETF Analyst at Bloomberg, investors injected a record $78.5 billion into ETFs in January, topping the prior monthly record by over 30%.
  • FINRA’s latest margin statistics show that borrowing by investors in November 2017 stood at an all-time high of $627.4 billion. This is almost a $100 billion increase over margin borrowing at the end of 2016—and more than double the level of borrowing at the end of 2010.
  • A record 66% of Americans expect stocks to rise over the next year.
  • The Daily Sentiment Index (DSI) for the S&P 500 hit a 20-year high of 96% bulls in late January, the highest reading in 20 years, while the Nasdaq hit a record 97% bullishness.

Nasdaq Index DSI and Nasdaq Index Futures, Source: Hedgefundtelemetry, Feb. 9, 2018

And what’s happened in the past two weeks?

Drawdowns of Major Assets

Data Source: Bloomberg, Table by author, Feb. 9, 2018

There is a great book by Charles Kindleberger titled “Manias, Panics and Crashes: A History of Financial Crises”. A passage from the book I keep close to my computer monitor: “At a late stage, speculation tends to detach itself from really valuable objects and turn to delusive ones. A larger and larger group of people seeks to become rich without any understanding of the processes involved. Not surprisingly, swindlers and catchpenny schemes flourish.” Think about that for a minute. Just in the past 20 years we have seen the rise and fall of dotcom companies, Beanie Babies and now cryptocurrencies.

So what does all of this mean going forward? Well, most importantly, the Fed is no longer a buyer of Treasury bonds—something they have been doing since 2008. The current plan for the Fed, under their quantitative tapering plan, will be to reduce their Treasury holdings by almost $250 billion this year. Time and market action will tell us if that plan comes to fruition. At the same time, it is estimated that the Treasury Department will issue over $1.4 trillion in bonds, nearly three times higher than last year’s issuance. 2018 will see the Fed flip from buyer to seller of bonds and the Treasury issue 300% more bonds than last year. This means that a lot of money will have to come into the bond market in order for rates to not move meaningfully higher. It would seem that unless the Fed was to reverse course, there is nowhere for interest rates to go but up. The “bond kings” Bill Gross and Jeffrey Gundlach have both been warning about this.

Bonds did not catch a bid this past week as stocks fell, something which usually doesn’t happen. The normal thing to see with a weak stock market is money flowing into the safety of Treasury bonds. The 10-year yield is at a precarious spot right now. It could break higher, possibly taking out the 3.0% level, or it could reverse and pullback to the 2.6% breakout level as this weekly chart shows.

CBOE 10-Year U.S. Treasury Yield Index (TNX), Source:, Feb. 9, 2018

This week will be telling on several fronts. Will volatility subside? Will the SPX continue higher, having double bottomed off its 200-day moving average? Will the dollar continue higher putting pressure on metals and commodities? These answers are unknowable. But one thing that is certain—2018 is not starting off like every other year since 2008. Volatility has returned with a vengeance and volume has greatly expanded. Something is different and it will be important for people to pay attention to how all of these highly correlated assets trade, especially in light of central bank changes and global market linkages.


Tim Taschler

CMT, Sprott Global


Tim has been involved with the financial industry for over 30 years.  In 1986-1988, he was a market maker (floor trader) at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT), where he traded through the ’87 stock market crash.  He has been involved in both private equity as well as public markets.  Tim is experienced with commodities, stocks, futures, options and bonds.

For the fourteen years prior to joining Sprott, Tim worked with both retail and institutional clients helping customize strategies seeking opportunistic asset allocations based primarily on technical analysis.  Using a top-down approach starting with global economic conditions, Tim looks at various global markets and equity sectors before drilling down to specific investment ideas that offer an acceptable risk/reward profile.  Focused on helping clients work toward their financial objectives, Tim designs strategies to build wealth and reduce risk.

Tim served as a Senior Vice President, Investments at Stifel (2012-2016) and at Wedbush (2007-2012).  Prior to that he was an Investment Advisor at AG Edwards (2003-2007) and worked in private equity (1996-2003) and technology (1987-1996).

Tim’s career has allowed him the opportunity to live and work in Europe, the Middle East and Asia.  He is a Chartered Market Technician (CMT) and a member of the Market Technicians Association (MTA), and is a director of the American Association of Professional Technical Analysts (AAPTA).  He graduated from the University of Dayton in 1979 with a B.A. in English.