It does not take a genius to know that the social media companies got completely crushed today. While ZNGA certainly had the worst day out of the bunch with the stock down huge
Livevol (r) www.livevol.com
There is an old saying on the floor: once a stock hits 90, it’s going to 100. The idea being that, once a stock gets the momentum to approach 100, it is probably going to get there. The same holds true for volatility. While volatility is itself mean reverting, uncertainty has a momentum to it. A few weeks back, when I wrote up a piece for Mad Money, I spoke about how the VIX appeared to be cycling down hitting lower lows and lower highs. I thought (and still do believe) that 2012 will be a good year for the S&P's. I then pointed out one important note: if the VIX can break 21 and hold it, the market is going to have some serious problems....
Welcome to serious problems:
Monday I wrote my “Backwards is no Bueno” post about the unusual action in the VIX futures and how the cash briefly backwardated with the soon to expire VIX May contract. That activity is not very good for the market, mostly because I think it show some nerves. Traders, rightly so, look around and see a little more uncertainty and price up SPX options. Sometime that push over comes the normal premium in the futures, as it did for a while on Monday. The slides below tell a continuation of that story. For longs, it is not a great one (even AAPL got smoked today).
Europe is putting big pressure on the US equity market. In fact, the close to close activity looks much more benign, I think, than the intraday selling. After watching the most overvalued security in the world, the TLT, trade to a new high for the year (and it could go higher as the Greek electorate figures out what happens after they get to replace their shiny Euros with TP), I looked at revisiting GRPN just post-earnings. A few things were bothersome about the activity today.
First the stock opened strong on better than expected earnings (more revenue and smaller losses), close to $14.97 and then proceeds to sell off with hasty abandon after the shorts covered. That is not a good sign for a stock.
I am thinking back to a different place, say mid March when the VIX was trading 13.66 this year. Traders could buy calls and watch them go up. Kind of simple really and the big reason options love a bull market (one of my favorite sayings I made up). Low implied volatility, high gamma and pretty easy on the direction makes for lots of happy people. The early rally this year made up for all of 2011 and at least for now looks like a near term high the market will not get back to for a while. For the VIX in 2011, we are darn near the highs for the year. And today went a bit backward.
This is a resilient market, but it is also a worried market. I just wanted to make a few comments about the current state of things in VIX into the weekend.
1. The Curve is flat:
The market is getting the flush this evening, as JP Morgan announces trading losses coming out of their CIO (Chief Investment Office). It was widely reported that this group was, pretty much, single-handedly crushing the insurance market for name CDS and other similar securities in the 1st quarter of 2012. Now it appears that the risk management office in the bank sold a little too much prior to the recent upswing in volatility. This is probably a good time to review “synthetics” (what JPM said they had on) and “selling volatility”, which, somewhere, it is assumed they are long.
After hours, JPM stock looks down around $3. In an iffy market like this, it won’t take much to have that crater- like opening market participants are getting used to.
More bad news from Europe, since the Greeks cannot get their act together on forming a government. It seems they do not want to beholden to the Germans and French. If they leave the Euro, I think, the Greeks will wish they were. This bailout thing that started in the mid-90’s with Mexico, went to Asia, then Russia, and now finds itself in Europe is becoming a real pain. The rule is countries cannot borrow and spend in currencies they cannot control.
Two days in a row, we have seen some pretty nutty market movement. You would not know it though by the close to close numbers. The best thing that can be said about the new Euro troubles is that US Equities don’t like the news, and then change their minds in a quick fashion. For those of you new to the Option Pit blog, that little market turnaround is know as realized volatility intraday. There are lots of ways to measure realized volatility, but the gist is that the underlying security is moving a whole bunch or not very much. One of my favorites to trade recently is UNG. This is a security that went from sleepy time to quick time in a hurry. Take a look at the intraday chart below.
Traders, I have to admit it, I was completely floored by the market reaction today. Last night, as I wrote my vol review for the week, I was almost certain that VIX cash and the VIX futures were going to backwardate, which as many of you know, is a sign of a near term bearish market, and typically, a market that is going to sell off. Then something happened, from out of the ashes of a major market break came a total rebound and an up on the day. At the same time, despite all that, VIX was that flat, and IV got smoked across the board, in both VIX and VVIX.
