Stocks rallied yesterday on a dose of good earnings and brisk GDP growth, coming despite the slow down in government spending. It is good news that the US economy continues to grow. As in 2011 and 2012 issues overseas can easily take front and center as they are this morning. The distribution of option volume in the SPY yesterday was not looking great for our rally. Mark rightly pointed out in the blog last night that there was no VIX buy in for the rally. Today he looks pretty right.
Near the end of the day we have a pretty solid bounce in the broader market with stocks recovering all but 6 or so handles from the previous day’s highs. The reason for the selloff was kind of uncertain, so with just so-so retail sales, things are back up to nicer levels. As Mark discussed yesterday, the IV only made a tepid response so the bounce is not too surprising. The quick rally and inability to make new highs over the last 2 weeks has shaken up the upside skew a bit.
The fact that we are off to the races again today does not surprise me too much (note the Wednesday blog). The good GDP number is being accepted by the market as a good thing. That means the Fed bond buying exercise is getting removed from the equation. Good news is good news again as the Fed starts to exit. I would not be surprised to see higher numbers for stocks in 2014 as global growth starts to pick up.
The market took another look over the edge today and decided to walk back from the brink. Whatever the uncertainty of the Taper brings, the reality that the Fed is peeling back because the economy is getting better. And as President Clinton, said “It is the economy, stupid.” Recall the early in the week the bid for the downside was perking up. This was the snap on Monday
Originally I was going to call the FB skew the Big Dipper but the shape of the curve is the other way. We had a little sell off today as the market finally ran out of helium and started to focus on fundamentals. FB was no different. After being a poster child for IPO busts FB has launched way above the low 40’s and is looking for new heights.
The story the skew is telling, is that the upside is where all the bets are being placed. Note the near linear upside curve going into earnings for the Nov 8 Weekly cycle. The FB Nov 8 Weekly 70 call is .40 bid at a 96 volatility. That is a near 35% pop on earnings.
While many of us are stuck watching the wankers on C-Span get nowhere it is refreshing to know that the world outside of our shores keeps moving along. The US equity market is in a malaise in either direction while the health care rollout and the budget discussions drag on. As a side note, if the medical industry was going in the can why would a company like SYK be buying MAKO for a fat premium? I digress.
Look at the performance of DRYS lately, or any dry bulk shipper for that matter. They all have doubled in the past month.
It is kind of a quiet day as we wind toward the close and my thoughts are wandering to what will happen next. The Fed is pumping again so my question is do we go higher or lower? The stock market is not giving back too much today. The only thing really getting slammed is the front term IV in the indexes, especially at the money.
The 3D chart here is very helpful for that. Note the large wasteland in the middle. That is implied volatility imploding ATM. The more interesting thing is where it is not imploding. Look at the upside call skew. That is still bid just a bit. That is a sign the upside skew is getting closer to the ATM implied volatility.
We are back to the bizarro world of bad news is good news. The housing numbers were not super great, although better than last year, but not enough to really thrill folks. So the market assumed QE is on forever I guess with the T-bill rallying. There still is short term enthusiasm for bonds amid the undeniable trend of rising rates as QE starts to wind down. As a friend of mine in college would say, "Let the funnies have their way."