Stocks made a little rally today on the good economic news in the morning. Much of the early gains went away as the day wore on. For what seems like the 5th time this week, the VIX cannot hold the lows of the day into the close. As I write this, with 30 minutes to go today, the sub-14 VIX came and went with the slow deterioration of sentiment.
Where did it come from? To keep with the story of the last couple weeks, the OTM puts continue to attract the attention of premium buyers. Maybe the Russian’s massing on the boarder has something to do with it but there is still a bid for OTM IV going into the weekend.
Following up on Friday’s action we did get a little pull back in the index skew today. VIX is in a touch and most of the vol. ETP’s might be even or down a touch with the market rolling in down .3%. There still feels like something is brewing out there, but I cannot put my finger on it. Gold is getting trounced since Ms. Yellen is looking more hawkish than dovish. Who knew? T-bonds are still clinging to some near term highs and that always gives me the heeby geebies until the shoe drops.
Stocks sniffed all-time highs again and pulled back from the brink. The simple answer is there is no reason to be running at all-time highs. That was enough to push stocks back off of their shiny new plateau. Since we are a volatility shop, let’s look at the underlying currents. The first stop is SDEX, it's still at nosebleed levels.
Charts by google finance
Next, if you look at the 3D skew ATM IV is coming in but the further one moves OTM, the rate of decline seems to taper. That would be the highlighted row moving right to left. What that means is there is a lack of willing sellers of downside puts.
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.