Morning Notes — Counter-Trend Opportunity

Volatility: The coordinated short-squeeze in GME and others from Reddit’s blog posts forced a mechanical de-leveraging yesterday, which led to the third largest-ever increase (+61.6%) in the CBOE Volatility Index (VIX).  While the spike in volatility came off a low base, the VIX deserves some attention in coming days as sustained increased volatility leads to lower equity multiples.

Ehhh: A sustained increase in equity volatility is usually preceded by evidence of systematic risk in FX and bond markets. Risk-sensitive, ‘safe-haven’ currencies like the yen and dollar typically rise and bond yields fall before systemic risk makes its way to equity markets.  But FX markets are fairly quiet and yesterday’s decline in 10-year Treasury yields reversed at our predetermined technical support range of 0.98%-1.00%.  The two-week long counter-trend move lower in bond yields looks like its run its course and we expect higher yields and curve steepening to drive cyclical/value outperformance in the weeks/months ahead.