There is little doubt that stocks are a different beast at the start of 2014. As we look at the VIX tank this morning, the index is getting to the magic number of 16%. That is a 1% move per day for the big SPX index. For 2013 the 360 day average realized volatility, take a guess, was 11.6%. The 10 day HV right now is almost 20%. Stocks have been smoking, mostly in the down direction.
Looking at how volatility has moved in the last couple of days, one would think that tomorrow's non-farms do not matter and that the markets are signaling all clear. Take a look at where March IV is relative to the SPX now, and where it was last Friday.
One thing to recongnize about volatility is that with out look at levels in the S&P 500, it doesn't tell the trader very much. However the simple numbers over the last day should be striking. Yesterday, the S&P sold off about 40 points, the VIX rallied about 3 points. Today the S&P is up about 14 points, the VIX is down just under 3 points.
I think this points to two things:
1. It makes clear how poorly the VIX performed yesterday. If the VIX was up 5 or 6 points yesterday (as it should have been) a 2.8% sell off would make sense.
2. Relative to the move, the recovery in the SPX vol is being sold aggresively.
The ISM report was not great today. On the brightside, bad news is bad news again. Should stocks be at an all-time high with weak economic numbers? The answer is probably not. The steady exit from the emerging markets is continuing apace with investors leaving at a good clip. As far as I can tell, Argentina and Turkey are suffering real issues, but the rest of the EM world is just kind of moving along. It does not matter when money wants to hit the exit, they just jump.
Stocks rallied yesterday on a dose of good earnings and brisk GDP growth, coming despite the slow down in government spending. It is good news that the US economy continues to grow. As in 2011 and 2012 issues overseas can easily take front and center as they are this morning. The distribution of option volume in the SPY yesterday was not looking great for our rally. Mark rightly pointed out in the blog last night that there was no VIX buy in for the rally. Today he looks pretty right.
If this was the end of the sell off, Option Markets were not buying into it. The VIX spent the entire day under performing the S&P; on a day where the S&P is up 1.1-1.3% I would have expected VIX to be down at least 2 points. To make matters even worse, what little performance there was in VIX on the day completely evaporated in the final 15 mintues as the VIX completely popped.
Thank you to all those who attended our Bear Market Trading seminar. Look for the March Seminar topic coming soon!
The Fed is continuing the modest tapering of bond purchases and thankfully ignoring the machinations in Turkey and Argentina. A stronger statement of course would be that they taper 20 billion instead of 10 billion. There were some hopes that maybe with stocks lower that they would ride to the rescue. That did not happen.
Despite the ugly sell off on Friday, it was not until today that I 'bought in' that this market might be ugly for a few days. Why? Because of VIX futures. When the VIX cash goes over VIX futures its not usually a big story. While with cash going over with about 25 days to expiration is a little more rare, it is still not much of a big deal. However, when the futures start to trade in contango, that is almost always a bad sign. Today, Feb and March flipped and Feb traded at a premium to March for a while. Take a look at a 30 minute chart of the relationship between the two months over the last weeks