Market Could Be Bottoming, Suggests Cantor Fitzgerald

The market could be bottoming, suggests Cantor Fitzgerald Chief Market Strategist Peter Cecchini. The report notes a VIX futures inversion curve.

"In our opinion, our late August into late September suggestion that a 5% to 7% selloff was upon us has largely played out. One condition in the index volatility surface that supports this view is the deep inversion in the VIX futures surface," said Cecchini.

"Yesterday, we noted the extensive VIX term structure inversion to June (see Table 1 below). While these inversions can last for a number of days, this inversion will likely be in its fourth day today. The previous multi-day inversion (ending in February) lasted 5 days, and the market rally began while the curve was still inverted. That inversion did not penetrate as 'deep' in the curve as the current inversion. This might indicate that the level of duress was less acute. Buy the dip was still operative and the bulk of taper was in front of (as opposed to behind) us," continued the analyst.

"As we noted in last Theta Thursday, the beginning of the VIX futures curve inversion was the start of an oversold condition. We suggested then that monetizing hedges with an eye towards rolling them out to cheaper and longer dated strategies made sense. We suggested yesterday that the full curve inversion was a sign that the selloff was reaching a crescendo. Certainly, the practical implication was and still is to roll out nearer-dated (higher implied vol) paper and take some money out of hedges. Yesterday, we began suggesting upside strategies with limited downside (call spreads on the S&P). Today, our suggestion is even stronger in that regard," he added.

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