Suring trading volume in a leveraged volatility ETF over the past month could be an indicator of an impending stock market pullback — depending on how you look at it.
Extreme volatility has already hit the bond markets, and it may just be a matter of time before it leaks into equities as well. From Bloomberg:
The ProShares Ultra VIX Short-Term Futures exchange-traded fund (UVXY), which uses leverage in an attempt to magnify the daily returns an investor would receive from holding VIX futures, posted record trading volumes in November, surpassing its unleveraged peer in this regard in three of the past four months.
So, volume has been rising in the UVXY, but what does that actually mean? For one, it means that traders are increasingly expecting a major negative move in stocks:
That could be a sign that investors are increasingly preparing for imminent turmoil in equities following the bond selloff, as VIX futures tend to move inversely to the S&P 500. Brean Capital LLC Head of Macro Strategy Peter Tchir noted that UVXY reached a record amount of shares outstanding on Wednesday, and that if history repeats itself, bond volatility could trickle through to other asset classes.
And with analyst sentiment skewing sharply bullish recently, we may finally get a much-needed pullback that stocks need in order to embark on the next leg higher.
The ProShares Trust Ultra VIX Short Term Futures ETF (NYSE:UVXY) rose $0.68 (+6.42%) to $11.28 per share in Thursday afternoon trading. Year-to-date, the largest leveraged ETF tied to volatility futures has plunged 92%.