In the last 3 days, the market has rallied about 30.00 dollars in the SPX. Knowing that, traders would expect the VIX to have gotten completely pasted as traders dumped volatility. Take a look at how S&P has moved and how VIX has moved.
More testimony leads to another flat day for the market. After the rally of the last 3 days a rest was needed. The strangest thing is the volatility crept into the market and is just as fast leaving the market. VIX cash was down .20 today and all the volatility products pretty much followed suit.
Stocks got a breather today with the SPX up just .10% to 1798 near the close. VIX somehow forgot about the weekend and should end up around .02 today. For the first time in a while, no news produced a market that did not sell off like the last several weeks. Stocks did not give back the low volume rally on Friday either. It feels like if the emerging markets yawn, stocks here do nothing, and there was a bit of that today.
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.