While the SPX only sold off 1% today, and is off less than 2% from the recent top, the VIX is sounding the alarm. On October 22nd the SPX closed 2052, the VIX settled 14.45%. Today, the SPX settled 2078, the VIX closed 16.52%. Generally speaking when we see the VIX incrementally hitting higher levels relative to similar levels in the SPX that is NOT a great sign for the market. The VIX has actually been creeping higher since early last week and appears to be primed to react hard to any sell off....essentially the market is become very tired of this sell off.
Ahead of nonfarm payrolls the general belief is that implied volatility will increase. This is true, where consus is wrong is when IV peaks. General consus is that it will peak on Thursday just before payrolls are announced. While historically this is true, it has not been true over the last few years. Look at the graph below, what one will notice is that IV has a pattern ahead of Nonfarms.
1. IV starts to rise Monday
2. It rises all the way until midday on Wednesday
3. There is a push to lower IV's, somewhat aggresively on Thursday morning
We all know that as companies mature there can be some permanent changes to the implied volatility of its options. They can go from low to high and back. Think how the IV of Corning (had their been options) would have appeared when they were in the business of making ugly cookware vs high end glass. That being said, when a stock hits a certain level of volatility that the options become disgustingly cheap it usually makes sense to buy some premium. Take a look at NetFlix IV:
Just about every source has written about how, the VXX is what we thought it was: a good way to day trade volatility and a terrible vehicle for tracking the VIX. We have written about it multiple times. , Bill at VIXandMore has, Jared at Condor Options has, actually just about everyone has. However, very rarely do we get such a clear example of how the ETN fails as a multi-day VIX tracker than we saw over the last two days.
While most coverage in the media is done on SPX and DJIA, the really interesting index over the last few weeks is actually the RUT. Take a look at the upward momentum in that index. Also, take a look at how fast that movement has been. It's incredible. At the same time the RUT IV is going no where. Take a look:
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.
LivevolX (r) www.livevol.com
I think the bond market is near calming down at which point so will VIX but the next day or so could be interesting.