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:
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.
There is no doubt we have had a whippy couple of days. Just when I though the Taper, FOMC and NFP were going to dominate the news along comes the Middle East dictator of the hour accused of using chemical weapons. This is an unfortunate and sad chapter for Syria as the Arab Spring tries to flower in other countries. For now rebels are stuck in a bit of stalemate and according to news accounts the Syrian Government is trying something new to break it. That brings repercussions from the US and possibly the UN. That is where we are and now the market waits.
Since this is a volatility blog we will get out of politics and into the trade. The two things happening today are:
The market is falling off today mostly as a result of the chatter on the “taper talk”. With economic data improving the reason for the Fed to become a bigger holder of debt is looking less and less like a necessary idea. From a volatility point of view how is the market starting to absorb the fact that the easy money days are soon to be over? The answer to that is the upside in VIX is starting to pick up.
A sleeping Giant has been awoken by Mobile Advertising. FB now appears like it is going to let all of those IPO buyers out of the stock and maybe more. I think selling at 38 though would be a huge mistake, because the stock appears to want to keep moving and IV appears to be heading higher in the near term. For starters IV is rallying with the stock.
Alcoa has the record today for adding the most market cap to broad market equity prices following just a ho hum earnings report. With a shortage of news and not much happy going on in Europe the only thing to make the market rally was good old AA. Did anyone notice the VIX got to near 14% today? We have to go all the way back to the pre-ending QE days to see a VIX around 14.35. My guess is if it breaks 14 stocks will have shaken the QE blues away. Stocks if anything this year have been a poster child for resiliency. A possible monkey wrench might be the rally in oil.
One of our Pro Clients had a funny quote in the Pro Chat today. He said, "The S&P 500 is up today. You don't see that every day. Oh wait a minute, yes you do." In a nutshell, that is what we have, a market that is finding new ways to rally on news like the better deficit numbers and greater bank lending.