Since the QE program started every Fed meeting has been met with a combination of shock and awe. Most of the shock going into the IV before the announcement and a lot of the awe is the sound traders make looking at the market with their mouths open waiting for news. I cannot blame anyone for waiting as we were doing that ourselves. Normally we try to position some sort of long gamma, which we did at the last minute, with some short volatility, which we avoided for the most part. The reason being this was a strange FOMC reading according to the IV changes throughout the day.
The last few days are if anything a sign that all good things must come to an end. The market has now gone from the proposition the Fed will stop buying paper to the realization that the Fed is going to stop buying paper.
There was a lot of touchiness this week waiting for the NFP. As it turns out the number was ok even with the unemployment rate making a small uptick. Stocks caught a bid and are starting the slow grind back of possibly regaining some of the highs we saw just a couple of weeks ago. What is hard to believe is that VIX hit 18.6 yesterday early in the morning and it is now trading 15.49. That is a more than 3 point drop from the highs. It also says a lot about near term implied volatility.
The market did a big reversal today. Actually I am surprised that the VIX came in as much as it did but my only answer for that is that put holders had to bail once we started to rally. Whatever set the market to making the 1.5% move from the bottom made traders dump their juice. Another place traders have been dumping juice is in TSLA.
Just coming back from an extended vacation I was surprised to see the market not making all-time highs. The only stock that seems to be there is TSLA but that is for tomorrow’s column. A weak ADP report and a balloon by a Fed governor was enough to send the market down 1.4% today. Mark commented yesterday on the frog in the pot (in Maine that would be a lobster in a pot but they don’t jump) for a volatility metaphor and it reminds me of the phase “volatility begets volatility”.
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:
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.
Most of the news is out from Big Ben and hte skinny is the Fed could taper bond purchases. The market is taking it fairly well as the the SPX is down about 1% today after being up almost 1% in the morning. I take it that where the Fed has to intervene less would be a good thing but the market has had so many up days that this would be enough reason for a pause. Things still look to be just ok which is much better than before in the bad old Euro crisis days. Remember SPX 1350? Just look at last year around this time.
With the VIX up .05 to 12.86 as I write this the market is taking a long overdue breather. For the last two weeks through good news and bad, stocks have rallied pretty hard. For instance AAPL has moved a lot but really has gone nowhere. I think the big winner has been GOOG running from around $800 to just over $900 in a two week span. Let take a look at the volatility in there.
On May 3rd the upside skew in GOOG was pointed down in the May 24 Weekly options. I had the ATM volatility around 20% and the 50 point OTM volatility around 17%. We call this a steeper upside curve as opposed to flat since the OTM options are trading for cheaper price pointing the curve down.
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