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Traders, I have 2 points to make today. First, I see little to celebrate in today's market movement. The SPX closed up over 2%, and the DOW was up almost 3%, but the VIX did not move in the same manner as SPX.
If one takes the time to quickly review where implied volatilities were the last time we were trading 1165 or so, one will notice something quite drastic. The green line below is drawn from where SPX vol was 4 trading days ago when the SPX was at 1166. Just visually, it is apparent how much higher implied volatility is relative to where it was only a few days ago. I think this is a major head fake.
To further prove things, VIX future has some interesting movement.
Futures were down across the board, but the term structure hardly moved. This implied there is still a massive amount of near term fear priced into the futures and an expectation that things are going to continue to be bad. It is one thing to be backwardated; it is another to be backwardated by almost 3%. That is a major amount of immediate fear.
Basically, any small bad news is going to send the market right back south and moderate to really bad news could absolutely clobber the market. I think many are waiting for another shoe to drop, and it could, if the Europeans don’t clean up their house.
VXN-VIX Update
On a more interesting note, I pointed out several days ago that VXN was trading at a major discount to VIX. It traded as high as 2.75%, lower than VIX. Anytime we have seen that type of spread form, things have righted themselves pretty quickly. Today we saw that happen as NDX had a pretty rough day most of the day, and VXN actually popped back over VIX today. This could signal that some of strength. We have seen in the NASDAQ stocks are over (that means you AAPL). My thoughts, I think it might make sense to sell NDX and buy SPX here, or possibly even one of the NASDAQ Alpha Index trades (AVSPY) anyone?
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Graphs from LiveVolPro
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