We continue to say that bond prices drive the market. Here is some intraday evidence. While they do not perfectly coorelate, I think one can quickly see how smart paper in bonds (via TLT) and VIX are thinking along similar lines.
One of the really fun parts about this Fed juiced market as we approach an announcement is that all the traders sit around and do nothing since we have to wait for what the Board of Governors comes out with. I can remember trading for a decade and a half and what the Fed was doing was at the bottom of the list. There was too much growth to contend with. We will know when things improve when each Fed minutes release take on less meaning. The underwhelming VIX over the last couple of days signals we might be moving that way. However, It does look like we are getting a signal in MSFT.
It’s interesting watching equity traders try to explain the idea of the market being over bought or oversold. When in truth the behavior in just about every market has little to nothing to do with what is going on fundamentally. The 10 year note continues to deteriorate and is slowly creeping toward 3%. With the rally in rates and sell off in bond prices the correlation between things like TLT and VIX. Take a look at 5 Day tick chart of TLT and VIX
Equities are going to finish with a tough week. The specter of Egyptian unrest, higher interest rates and the Fed tapering was enough to pull stocks from their lofty highs. I will say the reasons for the last two mean that the economy is getting better which should be good in the long run. In the short term the market has sold off 3-4% on the Tapering Boogeyman, so the selloff is not a total surprise.
There was a slight selloff today on what used to be good economic news. Better growth in Europe this time last year would have put us off to the races. The SPX was also almost 300 handles lower. That is right 300 handles. Mark has been writing about how cheap AAPL IV has been and for a comparison AAPL was $130 higher last year in the teeth of the Euro Zone issues.
With AAPL making a $50 move what has been happening to the IV? It has been going straight up. Today AAPL managed only a $9 gain as the rest of the market crapped out. Can Icahn really be the catalyst for a more than 10% move? Didn’t we have shareholder activist funds at the beginning of the year pounding the table to get AAPL to do something?
We have been commenting for some time how cheap AAPL IV is. While the news that Carl Icahn is buying 1 billion dollars worth of AAPL cause the stock to move and the implied volatility of the options to increase just because an options price goes higher, doesn't mean that opportunity is lost. Take a look at the closing price of the VIX of AAPL (VXAPL).
There are two main ways to correct. One comes with a drop in the underlying price of the market. This is something we saw in June when the market fell over 5% from the top. The other is a time correction, a time correction is typically when stock or index sits in a range, while its IV sits, then the stock begins to rally after a period of time. In a holding pattern, when IV rallies, typically there might be a sell off.
Right now, the current SPX holding period does not look like a sell off, the VIX is in a holding pattern along with the SPX.
Over the last earnings of AAPL I was flabbergasted at how little AAPL IV moved both ahead and after earnings. The stock basically sat there spinning as IV dipped lower and lower into the earnings calls. Many traders (me included) got beat bad playing the earnings volatility ahead of the announcement.