We have been commenting for sometime that we think the VIX is pointing towards some sort of market top, and is unlikely to move much lower. Today, we think we saw the proof. On a day the market was up pretty big, the SPX was up double digits. VIX, rallied all day closing near the top of the day. Take a quick look at at what is happening in SPX and SPX IV.
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.
Late in the day the broad market is up about .5% with the NASDAQ doing diddly since AAPL is in the toilet. While there was some positive news out on the Syria front it is hard to believe it was enough to drive equity prices to near record highs. I guess we can call it the Larry Summers Effect.
In the era of the Fed dominated market any news that keeps the liquidity pumps on is viewed as good. Mr. Summers, who would make a fine candidate, is not liberal enough with the extra dollars a Fed chairman needs to pump into the market these days. I guess that equates to a 1% rally at least until we gave half back.
The relatively predictable drop in VIX after the NFP today did not catch too many people by surprise. The real surprise was that it started to happen yesterday.
Note the change in implied volatility on the close Thursday. Pretty much all down the curve IV drifted lower. For the last several NFP reports that have been “taper sensitive” IV continued to stay bid well into the announcement. Not so this time and the market might finally be seeing the writing on the wall going forward.
The market for volatility seems to be giving up its final breaths today. If underwhelming earnings in GOOG and MSFT cannot push things lower I am running out of things to think of. The Fed has backtracked sufficiently enough and the world seems resigned to the fact that Europe will be a socialist basket case for a while during the public/private sector reshuffle. Portugal is the latest headliner and it is not making a dent. Detroit files for bankruptcy here maybe pushing up the Treasuries a bit. The net result this afternoon is a market down fractionally and the VIX down into the 12 handle at 12.91. What gives?
Despite all of the news that seems to be hitting the wire every day, the one story not being discussed is the giant SCREETCH the market is making as it completely stops moving. While longer term measures of HV like 20 and 30 day are still measuring as normal, and are even coming in above normal, near term HV has completely crashed. The market has completely stopped moving the last week. Take a look at this chart from Livevolpro.
When we have talked about the movement between SPX and Bond prices correlating in the extremely short term I think we get a really clear picture when we look at this week. After an abysmal week last week, the Fed has every governor on the planet out trying to push the ten year back below 2.5%. They have had success as one can see in the 1st chart below which is TLT.
Since the QE program started every Fed meeting has been met with a combination of shock and awe. Most of the shock going into the IV before the announcement and a lot of the awe is the sound traders make looking at the market with their mouths open waiting for news. I cannot blame anyone for waiting as we were doing that ourselves. Normally we try to position some sort of long gamma, which we did at the last minute, with some short volatility, which we avoided for the most part. The reason being this was a strange FOMC reading according to the IV changes throughout the day.