(VIX) has been unable to make lower lows as stocks made higher highs in recent weeks as it appears managers protected these insane gains of the last few weeks rather than piled in – beta-chase-style – as financial media would have us believe. VIX has broken back above 16 this morning adding to its biggest 2-day surge in 2 months and suggesting notably more downside for stocks from here.We suspect credit hedgers are spilling over into the equity protection markets as bond liquidty dries up and protection costs soar.

VIX has been warning for a few weeks that all was not well with this rally…

This is the biggest 2-day spike since we started to collapse in mid-October…

Given the correlation between VIX and high yield credit, we wonder if this is a spillover hedge for HY managers as they see liquidity vanish from the bond market (and CDX protection costs get rich).

Charts: Bloomberg