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Friday, March 29, 2024

BofA: If “Vol Becomes Contagious” Run For The Exits

Courtesy of ZeroHedge. View original post here.

As traders resume crash positions just weeks after the biggest market rout in years, here is Bank of America with a warning of what can really drag stocks lower. Spoiler alert: yes, it’s volatility once again, and specifically volatility, which last time was contained to the stock market, “becomes contagious.”

From BofA CIO Michael Hartnet:

Market structure concerns continue to grow: short equity volatility AUM ($66bn) + volatility-based & risk parity equity leverage ($200bn) + CTA AUM ($250bn) + risk premium/factor allocation ($300bn; link) = $816bn of “market structure” that could make the recent VIX ETF/ETN implosion a dress rehearsal for a major market correction if volatility becomes contagious next time.

Our equity derivatives team estimates that in the Feb’18 correction, quant funds had to unwind $200bn in 2 days.

This amid a market climate of record bullishness despite February’s vol quake.

And as a reminder, here one of the “ABC” warnings highlighted by BofA yesterday which would suggest a market top:

if semiconductor (SMH) & tech stocks (XLK) cannot make new highs in the next week or two, particularly at a time of soaring consumer confidence, then market highs could be seen in for the  next couple of months.

For now, it’s not looking good.

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