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Sep 11, 2017

S3 Analytics: Volatility Trading in VIX/Gold/Bank/U.S. Treasury/Corp Bond ETFs

Both the S&P 500 and Nasdaq are trading up over 1% as Hurricane Irma moves northward leaving behind catastrophic damage that was luckily, less than originally predicted and tensions with North Korea eased or at least did not escalate over the weekend. In addition to the stock market rallying, the U.S. dollar strengthened U.S. treasury yields rose and gold prices declined.

This broad decrease in volatility is reflected in ETF trading over the past week with gold, VIX, treasury, corporate and bank ETFs in the top twenty most actively traded ETFs for the week. The following eleven ETFs were in the top twenty most shorted and covered ETF’s for the week of September 2nd through 8th.

Short interest increased by $642 million in the GLD, GDX and GDXJ gold related ETF’s over the last week. The price of gold fell by 1.5% today after hitting its year to date high last Friday. Gold had been rallying since July, up 8% in less than two and a half months.

On the fixed income side, bond yields were up today and short sellers continued to add exposure to their longer duration treasury shorts (TLT) and short term credit bonds (CSJ) while covering $604 million of their high yield and investment grade corporate bond ETFs (HYG & LQD).

With bond yields rising, the bank sector is poised to increase margins on their loan and financing books. Short sellers covered $74 million, over 5%, of their exposure to the larger cap and regional banking ETFs last week and bank stocks were up 2.5% in aggregate today.

Lastly, with overall market volatility easing, short sellers increased their VIX ETF (VXX) exposure by $76 million and covered their inverse VIX ETF (XIV) exposure by $76 million as well. The VIX index is down 11.3% today and is again trading below 11 after hitting its year-to-date high of 16.04 on August 10th. Short interest in the long VIX ETF (VXX) is down $245 million, or 26%, and short interest in the inverse VIX ETF (XIV) is up $252 million, or 20%, since the beginning of August. This past week’s activity may be the start of a reversal in sentiment for the VIX as volatility continues to drain out of the markets.

With today’s market trading confirming the validity of last week’s ETF short activity, we should be seeing more of the same this week. More net short exposure in the VIX ETFs; short covering in the banking ETFs; shorting in longer term treasuries and short covering in corporate bonds; and short covering in the Gold ETFs.

Want deeper insight into the above analysis? Contact:
Managing Director Predictive Analytics, S3 Partners
The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC ('S3 Partners') to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks and merits, as well as the legal, tax, accounting and investment consequences, of such decision.

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