Step into the Wednesday time machine and not much happened between then and today. Traders have been so lulled into a stupor with the lack of movement that they bid volatility up to 15% yesterday when it looked like there was another crisis brewing. As of today no crisis, as holders of GOOG and other earnings reporters rejoice in the upside surprises.
Looking at the market rip up on the surprising housing news and the old highs are in the rearview mirror as stocks race ahead. Alex Jacobson, who I co-moderate the Options Block with on the Options Insider Radio Network, made a nice call last week watching the Dow transports make new highs and thinking the broader market was not too far behind. 1909 on the SPX and counting today as the shorts are going to have a hard time answering on this one.
Today we have another sleepy day moving into the weekend. As I write this VIX Is up about .18 to 13.15 but probably will not be there for long with the volatility futures hovering just up for the day. As catalysts go, the consumer confidence number hit a 6 year high and that did not do much to push the market into higher territory. My closet theory is the US budget talk is coming again and there has been a solid two year history now of how destabilizing that patter can be. The current back and forth is not what I would call a bullish conversation. The market in 2013 has weathered the payroll tax hike and spending cuts in, well, record fashion. That should make the Keynesians go back to their drawing boards. The
The bears were right. The market was due to fall apart any minute. The problem is that they have been saying that since 1100 on the SPX in 2011. Today the bears were right and they will be howling about it. The reality is the sentiment is now bent to the Fed getting out of the economy. At some point we will figure out how much the market priced in the Fed gas by how far the market crumbles. The SPX was down 40 handles and it felt like an orderly retreat. How so you say that when the VIX made a year high. It could have been much worse.
The Fed will release some information by Wednesday that most likely will tell us that they are going to stay the course which isbuying bonds for now with an eye toward easing in the future that is now approaching faster than the last time they commented on it. The market has picked up all the losses from last week on what I cannot quite figure. Maybe for the USA a Fed taper is good since that means the economy can roll on its own. I agree with that but the markets keep selling off every time there is a whiff of that. Let’s see if there is something in bond volatility that can help us.
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.
Ben Bernanke testified before Congress yesterday and said things were not too bad but could be better. He thought that both sides getting together to simplify the tax code would be great. One can still hope. The bigger news is that the Fed could stop buying bonds if the job outlook improves so they are waiting. Waiting generally means movement should slow down. No real surprise there since that is what they have said for a while. The market liked it in the morning and did not like it in the afternoon as 3 weeks of buying came to an end. Add a slowdown in China and we are down ¾% in the morning. Let’s look at how the bonds, via the TLT, reacted to the Fed news by the close yesterday.
Memory is a funky thing in the market. Right now many new investors and traders have the 2008 crash in the forefront of their minds. I don’t blame them. What we have had since then is mostly a declining volatility environment that has reared its ugly head on the big macro issues that faced us, namely the Euro and the US deficit. Remember it was the 1-2 punch that set things backward in the summer of 2011 since it looked like a total failure by leaders to get a handle on the problems of the day. Right now the trajectory appears to be better. How do we know? Every advance in fiscal prudence, even higher taxes, has been met with market rallies. Bernanke was QE’ing back in the Fall of 2012 and the market did not really take off until the Fisca
We were closing a position in the SL today and it was a ratio put spread turned into a very cheap (.04) butterfly and my feeling was BBRY is not quite done. Earnings are coming out in the July cycle and some trades that have been working very well lately are the modified earnings plays. What do I mean by that? Well the idea is to own gamma and pay very little in theta for duration of the trade. It is what Mark Longo calls on the Option Block “juice for free”.