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If recent volatility data shows anything, it’s that investors have reached a level of incredible complacency, according to Hedgeye CEO Keith McCullough.

In the clip above from The Macro Show, McCullough explains why he is short the S&P 500 based largely on the current level of implied volatility.

“Implied volatility” (i.e. the market’s expectations of future volatility implied by futures and options data) relative to “realized volatility (i.e. actual, historical market volatility) over the past 30-days has been smashed to a stunning -47% discount as of the morning of January 14. (An implied volatility discount suggests that investors expect markets to stay relatively placid. At extreme implied volatility discounts, this can suggest investor complacency.)

Why is there such a discount?

According to McCullough, because hedge funds clobbered in Q4 2018 are terrified of missing the next bullish move.

“People are constantly going back to the only place they feel comfortable,” McCullough explains in the clip above.

“And if they don’t make money when the market is going up, their investors will fire them. There’s a tremendous amount of pressure in the one to four-week window because most hedge funds that got smoked in the fourth quarter will go away in the first quarter if they screw it up again.”

Watch the full clip above for more.

McCullough: Short S&P 500 as Investors Grow Complacent - early look