Too many hedge funds out there told their customers “We will make money for you regardless of whether the market goes up or down”. Unfortunately, they forgot to mention the part where the market does neither. As a result of the hedgie crowd’s relentless scalping for a quarter point here and there, volatility has been driven out of the market. VIX and VXO are extremely low. VXO is 12.69 as I write. Today’s low of 12.63 is a new low for the year. Too many hedgies doing the same thing as a herd means none of them are making any money. The S&P Hedge Fund Index is essentially flat at +0.37% for the year.

But, as Bernie Schaeffer points out: “A swing from premium selling as the driver of option trades to premium buying will almost certainly have negative implications for the stock market. And the lower the level of the VXO when this swing begins, the greater will be the risk of an explosive downside market move.”