I have been closely watching the VIX curve over the last month for signals that this rally could end in the near future. Since March 12th, the SPY is about 1.10, a little less than .75%. In that same time the VIX has made exactly NO movement. Take a look at the VIX curve from March 12th vs. today:
It is incredible how similar the two curves are. If there is any difference, its that the current curve is slightly flatter, but barely. I might look at that as a hint, if there was any difference in the option market, potentially a much higher VIX might point toward some change.
The market has thoroughly shaken off the jobs report from Friday. While I watched for some headline news today, there did not seem like a lot out to cause us to rally and press the VIX down to 13.19. Mostly a lack of bad news, and we rallied. A failed merger in Greece of some big banks, and the TLT actually fell off by a good clip today. I guess we have two days of bizarro action (see Friday’s blog).
I know things are goofy when I have a backspread in the VIX for our Strategy Letter going into the NFP and the long side did nada today. With the VIX up around .49 near the end of the session and with the selloff there was zip for follow through in volatility. We mentioned early this week about the degree of “boughtness” (I just invented that word) in the protection products, namely index puts, VIX calls and the slow but steady increase in the TLT. Well the BOJ seemed to change all that. What the market saw as the light at the end of the QE tunnel in 2013 could easily be cast aside. The BOJ hit rates with a circus mallet and all the T Bond shorts ran for the hills. The NFP number just proved how unsteady our recovery
The VIX settled below 14 again today, selling off as the market rallied. This after it underperformed yesterday on the sell-off that briefly sent the market lower than 1550. One can see that while the S&P sold off yesterday and had a small rally today, the VIX has basically spun its wheels.
The market did not like any of the numbers today. It like FB and ZNGA but pretty much sold everything else. The two leading groups this year, banks and transports both took it on the chin. While I expect any healthy market to sell off now and again this was a funky sell off. Why? The easy answer is the volatility did not go up that much.
LiveVol just released some new goodies for scanning activity and I thought it would be instructive to walk through one of the simpler scans. With the market at all-time highs and volatility drifting lower, there is not much to note there. We have liked the market this year and there is not much to change that. So in a rising market is a buy write a good strategy?
One thing that is really interesting is how high realized volatility is in the VIX right now. While VVIX might be elevated, it actually pales in comparison to where realized vol on VIX cash is (even if the futures haven't been moving):
What causes this? One major thing to remember about volatility is that it represents standard deviations. The lower the price of the underlying, the lower the standard deviation should be. The VIX has, as you should know by now, really fallen off.
The TLT has been in a bit of a range for the last few weeks. I do not think it has broken a 3 dollar range since early March. This, is, very similar to SPX which, until recently, was spinning its wheels. Take a look at how tight the range is:
Yes I made that word up. I make them up all the time during the Pit Report. I was looking for a phrase to describe the activity, and it was hard to put things into words. Essentially market participants want return without taking risk, and then complain when they lose. The market for risk has become "sissified." The trend was started with the bailout of Mexico in the early 1990s and went to Asia, sort of hit the USA with LTCM and is now stuck in Europe where it will remain for some time. I think Europe had their Lehman moment and things got a little ugly after that. You might say TARP, but that was loan guarantees against bank assets.