Since the QE program started every Fed meeting has been met with a combination of shock and awe. Most of the shock going into the IV before the announcement and a lot of the awe is the sound traders make looking at the market with their mouths open waiting for news. I cannot blame anyone for waiting as we were doing that ourselves. Normally we try to position some sort of long gamma, which we did at the last minute, with some short volatility, which we avoided for the most part. The reason being this was a strange FOMC reading according to the IV changes throughout the day.
The Fed will release some information by Wednesday that most likely will tell us that they are going to stay the course which isbuying bonds for now with an eye toward easing in the future that is now approaching faster than the last time they commented on it. The market has picked up all the losses from last week on what I cannot quite figure. Maybe for the USA a Fed taper is good since that means the economy can roll on its own. I agree with that but the markets keep selling off every time there is a whiff of that. Let’s see if there is something in bond volatility that can help us.
The SPX continues to oscillate between 1610 and 1650, a pretty tight range. Yet as we said Volatility continues to rally. The truth is the market does not trust rallies right now and is buying into dips. A clear example can be seen today.
The SPX popped on the open, to the high on Friday, yet IV failed to fall levels we saw on Friday. And, unlike the VIX, the Livevol guys actually make up for the weekend issue, so the vols compare pretty well. Then as the market chopped in place and crept higher, so did IV.
As a young floor trader back in the old paper days there was always a need to put the trades on the “tape”. As in “the customer needs to see a print.” Hard to believe that it was such a big deal but at that time electronic execution was in its infancy. Back then traders did not want to be “on the wheel” because markets were updated by open outcry and the automated update systems were still having the kinks worked out. A print now takes on a whole new meaning. We can print things in 3D and the days of worrying about a trade hitting the tape on time are long since passed.
The last few days are if anything a sign that all good things must come to an end. The market has now gone from the proposition the Fed will stop buying paper to the realization that the Fed is going to stop buying paper.
The VIX cash has been backward over the VIX futures for a surprisingly large portion of this month so far. The same cannot be true for the VIX futures themselves. Usually the sign of an official sell off, the VIX futures have yet to go backward since this sell off began. However, if we get one more day like today, I think that all changes. The VIX curve is about as flat as it can get without being backward:
Over the last few weeks the market has had its sell offs, and its rallies. For the most part though the market has gone nowhere. At the same time, volume on the 10 year note futures has exploded and 10 year yields have gone from all-time lows to 18 month highs in a matter of weeks. TIPS now have a positive yield and VXTYN (the VIX of the ten year) has been climbing ever higher in the last few weeks, since yields started exploding.
After the “Goldilocks” NFP report on Friday the equity market held up pretty well considering the rip we had on Friday. In what is getting familiar Japan was up, Europe stable and the surprise news is that S&P changed their rating on the US debt nearly 2 years after the downgrade. This will Congress another reason not to do anything but at least for the time being the mix of tax hikes and spending cuts is keeping the market moving in the right direction. The trend for the year has been weak commodities so has the decline in the metals started to slow?
There was a lot of touchiness this week waiting for the NFP. As it turns out the number was ok even with the unemployment rate making a small uptick. Stocks caught a bid and are starting the slow grind back of possibly regaining some of the highs we saw just a couple of weeks ago. What is hard to believe is that VIX hit 18.6 yesterday early in the morning and it is now trading 15.49. That is a more than 3 point drop from the highs. It also says a lot about near term implied volatility.
The market did a big reversal today. Actually I am surprised that the VIX came in as much as it did but my only answer for that is that put holders had to bail once we started to rally. Whatever set the market to making the 1.5% move from the bottom made traders dump their juice. Another place traders have been dumping juice is in TSLA.