Last Friday, the VIX closed a touch over 13%. Historically low, and recently low. However, if the history is an indicator the VIX is likely to go higher. I think these events out of Washington are silly and likely to cause little to no real damage to the economy. But, the fear of a 2011 like scenario has taught the market a lesson: don't get over confident. Thus, despite little to no real movement today, VIX caught a nice little bid.
More fumblygook, new word, out of the Fed where there is a little he said/she said over the direction of the taper. As I write this, the House of Representatives passed a spending bill without funding for the new health law which should shake things up a bit in the Senate. All of this has some consequences for volatility.
Look at the IV30 for VIX this morning. It is pretty much trading at a year low. Look at the volatility spikes during the last two budget debates. I think IV is going higher and the volatility futures think so too.
It is kind of a quiet day as we wind toward the close and my thoughts are wandering to what will happen next. The Fed is pumping again so my question is do we go higher or lower? The stock market is not giving back too much today. The only thing really getting slammed is the front term IV in the indexes, especially at the money.
The 3D chart here is very helpful for that. Note the large wasteland in the middle. That is implied volatility imploding ATM. The more interesting thing is where it is not imploding. Look at the upside call skew. That is still bid just a bit. That is a sign the upside skew is getting closer to the ATM implied volatility.
With 30 minutes until the end of the trading day we are looking at a very confident market. I commented in the blog yesterday that there was substantial confidence going into the FOMC today. Of course I underestimated the confidence. All those folks sitting in cash are swearing at their statements today.
The Fed is worried we are not growing fast enough and wants to keep the little economy that could chugging along. My stocks are not complaining. From the Fed’s point of view if you love buying T-bills at 1.7% you really have to love them at 3%.
A client of ours sent me a stat that said, “Only 2 down days in last 14 for SPX leading into the official end of q/e........un-freakin -real!” I have to share that sentiment. While I have not been betting the market is going to go down I been thinking it would not go up this fast.
I gave up a long time ago trying to figure out why the market does what it does but at this point my guess is ….relief. The equity market is possibly quite happy that the Fed will start to exit. I guess we will see tomorrow. Either way it is a big rally on lots of unknowns.
Late in the day the broad market is up about .5% with the NASDAQ doing diddly since AAPL is in the toilet. While there was some positive news out on the Syria front it is hard to believe it was enough to drive equity prices to near record highs. I guess we can call it the Larry Summers Effect.
In the era of the Fed dominated market any news that keeps the liquidity pumps on is viewed as good. Mr. Summers, who would make a fine candidate, is not liberal enough with the extra dollars a Fed chairman needs to pump into the market these days. I guess that equates to a 1% rally at least until we gave half back.
The market is continuing its rally this week into the FOMC meeting on Wednesday. What I find odd is there is no solution in Syria, no confirmation on QE and Congress is about to get into Cage Match III with the POTUS on the next round of budget talks. And we continue to rally. That is confidence.
The bond market is lingering near the bottom with not a lot of movement today. The only real movement is in the VVIX, or volatility of the VIX. I have VVIX down 1.54 today but a good picture is below. Paper is pounding the Sep 15 puts on pretty heavy volume. The big spike is just heavy volume on lower IV. From this my guess is the downside move in VIX is done for now.
For the last two years, the FED has been willing to sell just about any downside put in the 10 and 30 year it could. During this don't fight the Fed trade, volatility in bond options plummeted, as did volatility in the instruments themselves. Now that the Fed appears to be ready to ease off its put selling, bond volatility is likely to begin rallying and will likely normalize.
There is a small sigh of relief in the ongoing Syria Crisis. Who would have thought that Mr. Putin steps in to be the humanitarian in all this? Starting the clock two weeks ago almost nothing has been to script. While the wags will parse the latest out of the State Dept. I want to look at something where the IV was actually up today instead of down.