The SPX continues to oscillate between 1610 and 1650, a pretty tight range. Yet as we said Volatility continues to rally. The truth is the market does not trust rallies right now and is buying into dips. A clear example can be seen today.
The SPX popped on the open, to the high on Friday, yet IV failed to fall levels we saw on Friday. And, unlike the VIX, the Livevol guys actually make up for the weekend issue, so the vols compare pretty well. Then as the market chopped in place and crept higher, so did IV.
The VIX cash has been backward over the VIX futures for a surprisingly large portion of this month so far. The same cannot be true for the VIX futures themselves. Usually the sign of an official sell off, the VIX futures have yet to go backward since this sell off began. However, if we get one more day like today, I think that all changes. The VIX curve is about as flat as it can get without being backward:
Over the last few weeks the market has had its sell offs, and its rallies. For the most part though the market has gone nowhere. At the same time, volume on the 10 year note futures has exploded and 10 year yields have gone from all-time lows to 18 month highs in a matter of weeks. TIPS now have a positive yield and VXTYN (the VIX of the ten year) has been climbing ever higher in the last few weeks, since yields started exploding.
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”.
It’s no secret that the bond market is volatile right now. The CME traded about 2 million 10 year notes today on the heels of bad economic news. This is a scary new trend; we have a risk asset and an equity asset moving together. Take a look at the chart of TLT and SPX:
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:
I while back I wrote up a piece about how the VIX and bond prices had gone completely haywire. While the VIX was near record lows, TLT (our equity equivalent for bond prices) was rallying to record highs. What makes this so odd is that typically Bonds and VIX are somewhat positively correlated. Clearly, the reason bonds rallied had little to do with fear and more to do with perceived fed buying. Take a look at the chart of TLT-VIX from the last few years.
Traders used to seeing S&P 500 futures and Eurodollars as the most active futures on the CMEGROUP will notice that over the last week volume on the 5 year, 10 year and 30 year have exploded. Since the Fed opened his mouth the flood gates have opened. For the 2nd time in 5 years the 10 year note traded over 2 million contracts, the 5 year almost traded 2 million contracts and the 2 and 30 year each traded near a million contracts. This is an explosion in volume that should not be ignored by the average trader. Take a look:
The news on the networks is that this is the 1st down week in some time for the SPX. All told the SPX gave away a touch over 1% and was down over 2% at certain points. Yet the VIX has barely rallied and the June VIX futures haven't moved. Take a look at this graph from VIXcentral.com:
We all know the VIX has been in a range for some time. This blog has on several occasions argued that it may be that way for a while. Yet, even with the relatively stable and lower VIX traders have been pointing toward the 'vol of vol' for high option premiums. This is a somewhat flawed argument. Yes the VIX options do expire into a cash settle, but the real underlying is the VIX futures which are less volatile than the cash market even some of the more advanced programs look at HV in terms of cash VIX instead of the futures.
Based on how much things are moving around in the cash, VIX option premiums are at some of the most expensive levels I have ever seen. Take a look at the relationship of 20 day HV and 30 day IV in VIX options.