To The Moon

Last week, after publishing a medium- to long‑term bullish view on U.S. equities in the piece titled “Government Reopening: Why It Could Ignite the Next Leg of the U.S. Stock Rally” equity indices did not immediately reverse higher, but instead remained stuck in a weak, choppy range near the lows. This time, the focus is on why U.S. equity indices are currently trapped in this kind of weak consolidation, and how retail investors should respond and hedge risk.​

The global market is now in a dangerous transition characterized by a “macro data blackout + liquidity repricing,” during which index directionality is weak, but volatility pricing is prone to sudden upward spikes.

In this phase, from the perspective of overall tactical portfolio construction, VIX is better suited to be a core asset for “buying on dips.”​

A frightening macro data blackout: direction unclear, volatility certain​

The current major drawdown in U.S. equities is unfolding during an unusually challenging “frightening data blackout cycle.” The prolonged government shutdown has created a dense gap in macro data, forcing the market’s understanding of fundamentals into a “half‑blind” state in which any new data point or official comment can amplify market swings.​

Against this backdrop, index price action is easily pulled into a “volatility swamp driven by flows and sentiment,” where the volatility is frequently triggered. This makes taking outright, one‑sided directional exposure without protection extremely risky.

From a medium‑ to long‑term perspective, the stance on U.S. equities remains cautiously optimistic on the long side, on the condition that the two core drivers of this bull market have not fundamentally reversed.​

First, the mega‑cap tech names—especially the big tech and big AI complex, including core constituents such as the M7—continue to deliver strong earnings and results, and the internal momentum for valuation expansion is still in place.

Second, the Federal Reserve’s easing cycle has not fully ended: the possibilities of halting balance‑sheet runoff, or even modest balance‑sheet expansion, remain on the table, and the rate‑cut cycle that began earlier has not concluded, continuing to provide external support to risk‑asset valuations.

These correspond to the two “wheels” of valuation expansion: internal and external drivers.​

From a seasonal standpoint, the historical probability of a year‑end “Santa Claus rally” is not low, typically clustering in the window from late December to early January, when market tends to rise. This implies that there is still room for the medium‑ to long‑term upward trend to play out.

A more reasonable scenario, therefore, is that from now until mid‑ to late December, U.S. equities will most likely oscillate repeatedly within a relatively elevated range, using time to trade for space and building a more solid bottom structure.

In such a “neither convincingly high nor decisively low” phase where time is used to trade for space, the most appropriate response is not to make heavy one‑sided bets.

Instead, it is to adopt light positioning, tight stop‑loss control, and high‑probability strategies centered on options, while especially avoiding unprotected naked directional exposure; otherwise, once volatility expands, drawdowns can quickly spin out of control.​

This kind of environment—“unclear direction but active volatility”—naturally favors volatility strategies around VIX and lays the macro and structural groundwork for a “buy‑the‑dip in VIX” approach.

Patiently waiting for easing​

One of the core pillars of the constructive long‑term view on U.S. equities has been the expectation that, after the government reopens, the large cash balance sitting in the U.S. Treasury’s TGA account would gradually be released into the market like a “dammed lake discharging,” injecting substantial liquidity into the financial system and thereby supporting and boosting equities. This logic remains intact and has not been invalidated.​

However, the latest data (compiled by JPMorgan) show that as of last Friday, the Treasury’s cash balance not only failed to decline but actually rose by about 19 billion dollars in a single week, bringing the total to roughly 961.9 billion dollars. This indicates that this “dammed lake” of funds has yet to be meaningfully released back into the market.​

JPMorgan’s explanation is that, after the government reopened, there is a considerable lag in the pace at which various departments and agencies resume spending, due to administrative and budget‑execution delays. This has slowed the actual outflow of fiscal funds and thus postponed the timing of liquidity injection into financial markets.​

From this, one can infer that the process of releasing this dammed‑up liquidity may accelerate sharply from a certain point in time. JPMorgan’s answer is that this inflection point is likely to be around this Wednesday, suggesting that the improvement in liquidity is more likely to be “delayed but not absent.”

From a micro price‑signal perspective, the spread between the repo rate and the Tri‑Party General Collateral Rate (Tri‑Party GC) is particularly important.

Tri‑Party GC, which measures the cost of overnight tri‑party repos backed by U.S. Treasuries, mainly reflects the price at which non‑bank institutions (such as money‑market funds) obtain short‑term financing with Treasuries as collateral and is one of the core benchmarks in the secured funding‑rate complex.

The spread between this rate and the interbank overnight repo rate effectively captures the degree of ease or tightness with which liquidity is transmitted from the banking system to the non‑bank system.​

At present, this spread is clearly narrowing, indicating that the prior state of liquidity tightness is easing。This also means that, asset prices may not immediately trend higher in a one‑way fashion.

At the same time, another risk warrants attention: although signs of marginal improvement in liquidity have begun to appear, expectations for a rate cut in December have weakened noticeably in recent weeks​

This combination of “liquidity expectations diverging from rate‑cut expectations” intensifies the repricing pressure on bond yields—particularly on investment‑grade bond yields—as well as on equity valuations.

As a result, volatility indices such as VIX are subject to frequent, alternating upward and downward shocks, which in turn creates more attractive price zones for accumulating VIX at relatively low levels.

Tech bond issuance and rate‑cut expectations: key to whether the pullback has ended​

Within the equity market’s internal structure, big tech remains the most important pillar of both valuation and earnings in the U.S. bull market, but on the funding side, it is facing new challenges.

Recently, tech giants such as Alphabet (Google’s parent), Meta, and Oracle have all signaled or pursued additional bond issuance, while, according to Bloomberg’s estimates, Amazon’s capital expenditures next year are expected to exceed 147 billion dollars.​

Such large‑scale investment will inevitably rely on bond financing, which means that, after 2025, the overall bond‑issuance needs of the tech sector will rise significantly, putting pressure on operating cash flows.

Against this backdrop, whether long‑term yields can retreat and whether rate‑cut expectations can stabilize and recover becomes the key determinant of whether the current pullback can come to a temporary end.​

However, because the prolonged shutdown has led to severe gaps in macro data, the sensitivity of December rate‑cut expectations has been greatly amplified.​

Apart from the nonfarm payrolls report scheduled for release on November 20, there are still many missing pieces in the economic data set.

If there is an attempt to fill these gaps intensively before the December FOMC meeting, the market may question the reliability and feasibility of such releases.​

If data release follows a normal schedule instead, much of it will necessarily be pushed to after the December policy meeting, which is also why the mainstream view in the market is that December is highly likely to see a pause in rate cuts.​

Because clearer policy signals are being pushed back, the high‑volatility window stretching from now to mid‑ to late December is being passively extended.

In this sense, portfolio construction in the current phase should take “buying VIX on dips” as its core guiding principle, while patiently waiting for more attractive volatility entry points during short‑term equity rebounds.

Strategy focus: buying VIX on dips and building around volatility​

After synthesizing macro, liquidity, technical, and cross‑asset signals, the conclusion is that in the current environment investors should continue to consider a “buy‑the‑dip in VIX” strategy and treat it as one of the foundational components of portfolio construction.

For investors who have access to futures trading, it may be appropriate to build long positions in VIX futures on dips, but given the extremely high risk associated with VIX volatility, profits should be taken relatively quickly once gains are realized.

For investors who lack access to futures, similar volatility exposure can be achieved through VIX‑related ETFs.​

In terms of execution timing, more favorable entry points often occur during technical rebounds following short‑term oversold conditions in equity indices.

For example, if, after Nvidia’s earnings release, the market reacts positively to the results, this could spark a short‑term rebound; similarly, if nonfarm payroll data come in and help alleviate near‑term fear, indices such as the S&P may undergo a technical recovery.

In such rebound phases, VIX often pulls back by a certain margin, providing more attractive entry levels for buying at relatively low prices.​

Concretely, one approach is to buy VIX or VIX ETFs outright when the index or ETF price declines, thus positioning for future gains as volatility climbs again.

Another approach is to sell put options on VIX ETFs near prior lows, collecting premium as a way to obtain a “buffered long volatility” position.

Risk points and stop‑loss strategy​

However, there is an important risk to note: if the VIX index breaks below short‑term support and, at the same time, improving liquidity drives 2‑year and 10‑year U.S. Treasury yields into a sustained downtrend, the stance should shift promptly to a bullish view on U.S. equity indices.

In that scenario, long VIX positions should be cut in a timely manner.

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