The fabric of the market is showing signs of fracturing, as 9 years of declining policy rates and 6 years of QEs failed to kick-off growth, while, as Fasanara Capital's Francesco Filia notes, further easing has a visibly decreasing marginal effectiveness. It is end-of-cycle-type policymaking and market responsiveness and while some markets and sentiment reflect the concerns of a tail-risk-like collapse, stocks remain dissonant in the medium-term to the ongoing rioting against monetary activism and market manipulation by global Central Banks.





As we detailed previously, demand for short-term crash protection increased last week to record highs...



The CS Fear Barometer (which measures 3M sentiment) fell to near a 1-year low of 26%, suggesting constructive medium-term investor sentiment...







And the volatility of VIX is entirely unphased...





So, CS Fear Barometer and vol-of-vol do not show signs of panic and suggest market participants are not protecting for a crash.

Furthemore, S&P 500's 12% drop from top is "simply not enough" given the cross asset collapse around the world, Evercore ISI technical analyst Rich Ross said in note to clients today.



Credit markets, however, have started to suggest some notable concerns growing. As Goldman shows, even Investment grade credit has started to collapse...

Flashing a big warning for stocks in the last week...







And despite the record skews, the cost of downside tail-risk protection in stocks is still notably lower than in credit...







Credit Suisse explains:

Our desk has seen only short-term hedging. Particularly interesting, insurance companies are buying puts that knockout down 20%. These puts are cheaper because they go away at the point you may want it most. It suggests insurance companies think the market has 5-10% downside but are not worried about a 20%-plus crash. The market does not believe there is a systemic pullback/crash coming , so if you are bullish, that's a datapoint to hold onto.

However, if this kind of cognitive dissonance makes you wnat to hedge even more, we remind readers of the stealthy way in which some market particpants are betting on a collapse in stocks... it appears many market participants are piling into par Eurodollar calls:

[the chart shows the cumulative open interest in par calls on eurodollar futures contracts that expire in 2016 and 2017 - basically options on short-term interest rates with a strike price of zero, such that they pay out if the Fed takes rates negative]

When queried whether this is indeed a trade to bet on a market drop, Michael Green responded as follows:

[A reader] thought this might be an attempt by hedge funds to hedge out their exposure to rising interest rates very cheaply. My initial idea was that it actually could be a bet on negative rates (if for some reason the Fed had to come back into the picture with QE4). The bottom line: "Deep OTM puts on the S&P are very expensive while par ED calls are relatively cheap. In my view, we are that inflection point where the Fed is going to start to waffle…the bear market beckons and they will not be able to stick with their interest rate guidance. Of course, markets tend to frown on Central Bankers revealed as less than omniscient..."

So in short: stock market participants remain convinced that long-lasting 'significant' downside is impossible (despite short-term 'small-drop' hedging), because they expect The Fed to save the world once again. That's why sentiment is extreme but positioning is not and the equity market is simply far from prepared for further (or lower for longers) downside.