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.
2014 started off with a big thud. I do a radio podcast on The Options Insider Radio Network on Thursdays, and there was some speculation that the sell off was from longs needing to raise money to pay taxes. All the big names got smacked a bit after posting very good 2013’s. Conversely, gold is launching probably from an end to tax loss selling. The government is still in the market….
After yesterday's rally we were not shocked that the SPX gave away a few points. What was surprising was how the IV reacted with the S&P's recovery. Take a look at Jan IV and the S&P on an intraday basis from today:
Without parsing what the Fed said, they are officially starting to wind down their extraordinary measures. Maybe Ben pulled the Congressional leaders aside and said “Hey you idiots, I am done and there is nothing more I can do.” I guess it worked because if we can get sane fiscal policy, things should be ok.
The VIX was in total freefall today. There was a shiver at the beginning but there is no doubt that volatility lost a significant bid today. After all the talk of VIX being up for so many straight days it is mute now. SPY closed just pennies from the all-time high and unless there is some sort of extraneous event, we will make new highs this year.
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