It looked real ugly this morning toward noon. From what I could tell there was enough decent news to push stocks higher pre-open and then the flood gates of selling opened, hitting the momentum stocks particularly hard. The on again/off again saga of the Russians camping out in the Ukraine is putting the market into a tizzy. A near term weak market gets downright ugly when the liquidity dries up after countries start shooting at each other.
Today was a serious test: was the market going to completely give it away, or was what we saw today the bottom. In clear order, it seems that, all other things being equal, we hit a bottom on Friday. Watching the relationship between S&P and VIX intraday, one could see earlier in the day, even as the SPX was hitting new highs, the VIX was climbing. We quickly sold off.
As vol rallied earlier this week, it was noted by a few people that the spread between SPX vol, the VIX and NDX vol, the VXN is at its widest point in years. One might think that with the NDX calming down and VIX moving back to the sub 14 level that the spread would have tightened significantly...it has not. Take a look:
It has been about a month since the VIX broke from its highs. Since then the S&P has crept higher and/or floated around 1850-1880 somewhat consistently. While there has been some gyration of prices for the most part, SPX vol has been stable. At the same time, VIX has been so stable and range bound at a level that remains stubbornly above 14 and more like 14.50-15%. However, I am wondering whether that time may be ending. Take a look at the VIX futures from Today and two days ago.
Today, as Janet Yellen spoke, the markets got spooked. She seemed to potentially move up the time table on when rates might move. Markets got rattled...for a second. Check out the way VIX and VIX option vol (VVIX moved).
The VIX is now near 14.50, and IV is now back at 75%. Sounds great, except, that is still elevated relative to where the lows have been over the last year or so. So the question is, is the market ready to start a normal move higher, or is this a simple break before China and Russia cause more problems? Keep an eye on the range the VIX trades in, since the VIX topped 20 last month it has failed to hold below 14, additionally IV of the options stayed high and kept creeping higher. Take a look at the chart below:
Well, like the Greek referendum in 2012, they came, they voted and stocks rallied. I am talking about the Crimean’s who don’t seem to want anything to do with the rest of Ukraine. How it all shakes out is a bit of a mystery, but some very select Ukrainians and Russians will not be able to go to their ATM machines anymore when they fly to London or New York. That message hit loud and clear as both Russian and US stocks rallied back a bit today.
At the money volatility got hit in all the big indexes as you can see from the Livevol Term Structure slice below.
One of the interesting things to look at is the correlation of a stock to its IV. One thing we know is that typically, when IV is creeping up with a stock price, at a minimum, there is going to be a strong move at some point. The vol will almost always 'pay the piper.' We saw this recently in VIX. While VIX itself stayed stable and (relative to the last year) elevated 14+ , the IV of its options was slowly climbing: