Stocks are shaking off just about everything at this point such as Iraq, Iran, Ukraine, Syria and of course that paradise on the Med, the Gaza Strip. Slow growth in Europe, who cares. WMT swamped in health care costs, take it up. Volatility, well just sell the crap out of it. VIX is now deep into the 12 handle and we might sniff 11% tomorrow.
While I believe that the VIX is not going to 20, I think today's move below 13% might be over done. The VIX has not just eased off the last few days, it has borderline crashed. Take a look at how it looks incomparison to the S&P:
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We all know the story. Troy is finally sacked by the gift of an enemy-impregnated horse the size of a house. Browsing through the WSJ online I see an an Orthodox Priest blessing a fleet of aid trucks. I half think there might be some Spetsnaz Commandos lying in wait in those bad boys. With the gimpy stock market today I am not the only one. I am all for Putin giving aid to the hungry but it is still tough to believe.
We all know that as companies mature there can be some permanent changes to the implied volatility of its options. They can go from low to high and back. Think how the IV of Corning (had their been options) would have appeared when they were in the business of making ugly cookware vs high end glass. That being said, when a stock hits a certain level of volatility that the options become disgustingly cheap it usually makes sense to buy some premium. Take a look at NetFlix IV:
I started trading options as a floor trader in 1991 right about the same time as Gulf War 1. The runup to the war was characterized by gloom, volatility and really weak stock prices. I think the Dow was 2300 or so. Not much has changed in the 24 years since then through several other political crises and GW2. The one constant has been after the USA goes in and starts shooting, stocks rally and the VIX cracks. Until today that is, or maybe.
I am not one to be into technical analysis. However, to say that they completely don't matter is probably a stretch. For instance, up until today, the 100 Day Moving Average was acting like a trampoline. Everytime the S&P touched the level it would bounce. If you think traders weren't watching the level, take a look at how the VIX would move when the SPX crossed 1913 (the 100 Day)
Thankfully you are not a Russian IRA holder right now. Normally when the USA invades stocks are in a state of suspended animation and then they pop. Historically that is what happens. If the Russians invade Ukraine I am not so sure the same thing will happen. The RSX will probably sell off another 2 or 3% easy. Stocks here will sit in limbo to slightly lower. We have recent history of the RSX and SPY to confirm that.
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While I do agree that there is little predictive value in the VIX on its own, two things that I do think have some predictive qualtites are the relative performance of VIX relative to the SPX and VIX term structure. The one I want to concentrate on today is term structure.
I won’t call today a turnaround day but it was noteworthy for the selloff that wasn’t. The 2 min ceasefire in the Gaza strip did not help. The sideways motion in the Ukraine did not help. The ok jobs report did get stocks back to even at one point but there is still some sadness in the air.
That sadness has helped propel volatility to 3 month highs in many areas. The VXEEM is making a near term high this week even when there has not been a whole lot of movement in the EEM with the 20 day realized volatility just hitting the high 13s.