Mark Sebastian's blog

The SPX continues to oscillate between 1610 and 1650, a pretty tight range.  Yet as we said Volatility continues to rally.  The truth is the market does not trust rallies right now and is buying into dips.  A clear example can be seen today.

The SPX popped on the open, to the high on Friday, yet IV failed to fall levels we saw on Friday.  And, unlike the VIX, the Livevol guys actually make up for the weekend issue, so the vols compare pretty well.  Then as the market chopped in place and crept higher, so did IV.

LivevolX (r) www.livevol.com

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The VIX cash has been backward over the VIX futures for a surprisingly large portion of this month so far.  The same cannot be true for the VIX futures themselves.  Usually the sign of an official sell off, the VIX futures have yet to go backward since this sell off began.  However, if we get one more day like today, I think that all changes.  The VIX curve is about as flat as it can get without being backward:

www.vixcentral.com

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Over the last few weeks the market has had its sell offs, and its rallies.  For the most part though the market has gone nowhere.  At the same time, volume on the 10 year note futures has exploded and 10 year yields have gone from all-time lows to 18 month highs in a matter of weeks.  TIPS now have a positive yield and VXTYN (the VIX of the ten year) has been climbing ever higher in the last few weeks, since yields started exploding.

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The VIX futures are trading at their highest levels since the Italian Election debacle.  Yet the term structures are entirely different.  This is what the current structure looks like:

www.vixcentral.com

Now compare that to what the VIX structure looked like at the end of the day on February 25th.

www.vixcentral.com

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It’s no secret that the bond market is volatile right now.  The CME traded about 2 million 10 year notes today on the heels of bad economic news.  This is a scary new trend; we have a risk asset and an equity asset moving together.  Take a look at the chart of TLT and SPX:

www.tdameritrade.com

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Today, our COO Mark Sebastian was on Bloomberg TV to discuss options on P&G.  He made two points about P&G

1.  That it was an industry play:  XLP is near an all-time high and is weakening because of rising bond rates

2.  That this is a company play: P&G has underperformed, can the new CEO fix the problem.

Watch the replay below:

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While the market appears to be spinning its wheels, and the T-notes completely explode, the VX futures have quietly ignored the entire drama that has unfolded me the last week.  If you told me that the 10 year note would trade 3 million contracts in a day, I would have assumed the VIX would be above 40, that simply hasn't happend.  The futures have had such an incredibly tight range I am SHOCKED that VIX option IV is holding up.  Take a look at what the futures curves have done the last few days:

www.vixcentral.com

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I while back I wrote up a piece about how the VIX and bond prices had gone completely haywire.  While the VIX was near record lows, TLT (our equity equivalent for bond prices) was rallying to record highs.  What makes this so odd is that typically Bonds and VIX are somewhat positively correlated.  Clearly, the reason bonds rallied had little to do with fear and more to do with perceived fed buying.  Take a look at the chart of TLT-VIX from the last few years.

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Traders used to seeing S&P 500 futures and Eurodollars as the most active futures on the CMEGROUP will notice that over the last week volume on the 5 year, 10 year and 30 year have exploded.  Since the Fed opened his mouth the flood gates have opened.  For the 2nd time in 5 years the 10 year note traded over 2 million contracts, the 5 year almost traded 2 million contracts and the 2 and 30 year each traded near a million contracts.  This is an explosion in volume that should not be ignored by the average trader.  Take a look:

Graph from TD Ameritrade

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The news on the networks is that this is the 1st down week in some time for the SPX.  All told the SPX gave away a touch over 1% and was down over 2% at certain points.  Yet the VIX has barely rallied and the June VIX futures haven't moved.  Take a look at this graph from VIXcentral.com:

www.vixcentral.com

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