While market are having a chaotic start to the year, investors are withdrawing money from securities that profit from higher volatility at the same time as short sellers are piling into bets that tranquility will return. Traders yanked $850 million from two of the most popular exchange-traded products tracking moves in the Chicago Board Options Exchange Volatility Index in January.
The positioning reflects speculation that something will cause volatility to drain out of a U.S. stock market where as much as $2.4 trillion of value was erased. Traders such as Mizuho Securities USA Inc.’s Monish Shah and JonesTrading Institutional Services’ Dave Lutz say the selloff has gone too far and that central banks will help counter the effects of a Chinese economic slowdown and slump in oil.
The Standard & Poor’s 500 Index has lost 8.2 percent this month, heading for its biggest plunge since May 2010, on mounting worries that the Federal Reserve removed its life support too soon. The VIX, which tends to move inversely to U.S. stocks, has risen 33 percent -- and securities that climb with it have jumped too.
However, rather than signaling a decline in equity turbulence, outflows could just mean that investors are cashing out, according to Nicola Marinelli of Pentalpha Capital Ltd.
“This stuff makes money only in few instances, so when that happens you take profit,” said Marinelli, a fund manager who helps oversee 114 million euros ($124 million) at Pentalpha in London. “Central banks have less and less power.”
In addition to dovish central-bank statements, stocks should get a boost from the earnings season, which has started better than expected. McDonald’s Corp. posted its best quarterly growth in almost four years, and JPMorgan Chase & Co. reported profit that beat analyst projections.