Ever since this summer when AMZN kicked the tar out of COST and WMT for buying toney retail space owner WFM, I have been waiting for the next victim. Meal maker BLUE got thrashed but that was kind of a David and Goliath battle anyway. WBA is no market pansy but rather a real heavyweight globally in prescription drugs. It did not matter much as the leader premium got kicked out of WBA in a hurry.
Sometimes clients ask me what trading in the mid-to-90’s was like and I tell them, “fun”! There was Long Term Capital and the Russian Debt crisis but really those were small blips in the rally. The big internet boom was booming and aside from those sharp but short drop offs stocks flew and volatility went up with it. There were many days when stocks just took off for $50 rallies and then did it again the next day.
There was a time not too long ago where any hint of Euro disunity caused big ripples in the markets. We had the Greek elections and debt crisis and MF Global blew out on what turned out to be a good bet long PIGS debt. Spain is having a mini-crisis around the Catalan state leaving and US markets mostly shrugged.
As we run to all-time highs for SPX and RUT plain kicking the door down, VIX notched in a 9 handle close. All is normal, as the BIG VOL INDEX runs the way it is supposed to. Now the issue really is why the VIX Oct future remains above 12 with less than 3 weeks to go. The short answer is the future traders are holding out. Waiting for the next DJT Tweet bomb or a NK dirt clod fight has left premium sellers a little shell shocked. They won't give it up.
Rumors or facts are circulating outside of DC for once. It looks like a midsize hedge fund had to close a short contract position and helped the VIX to a nasty settlement on Wednesday by helping up the IV in SPX. The Total Tuesday Vol Crush gave way to the VIX pop on Wednesday and early Thursday. What it did set up was a strange dynamic in the VIX futures.
My general rule trading TWTR is don’t get long without puts. After learning the hard way on the 2015 trip from mid 30 to the low 14s in 2016 the only thing that kept it from being a disaster was rolling my put protection down. The near takeout in Oct/Nov gave me an exit which I took. Now here we sit around 17.09 with Jan IV in the 30 handle. Noone cares for the Dirty Bird anymore.
So as 2017 gets off to a raucous start let us compare and contrast with the start of 2017. VIX was around 19.50 at the beginning of 2016 and quickly moved to the 30s as traders let the potential calamity of rising interest rates and possible Chinese meltdown rule the day. We got the rate rise but China is still chugging albeit at exactly the same spot it was last year. The only thing really different is that there is a new man in the White House come Jan 20th. VIX is 11.85 going into the transition.
Stocks have lost their way lately and can't really make a move anywhere. Mostly that has got VIX moving with VIX cash moving to the mid-13's. Yes you heard that we rallied hard to the mid 13s. VIX Jan futures are getting close to 15. This in a market where 60 day realized vol is still in the single digits. VIX is pricing something that will happen next week. Maybe around a surprise in rates to go along with the higher volatility in the rate complex.
It seems since the August Flash Crash this is the cheapest volatility has gotten since before that time. When I look at a vol chart it seems there is this year and last year. When I look at BAC it is no exception. There was last year’s IV and this year’s IV and now we have very low IV going into earnings. I read this as the market expects little out of this earnings cycle. Except someone forgot to tell the equity markets as they have raced to new highs.
Stocks got a little lift today on what I do not know. Draghi made some veiled references but for the most part the Euro kept up it's inexorable climb along with the JPN YEN holding up at year highs. Who would have thought the dollar would be in the tank and the two most troubled trading blocks enjoy bouncy currencies. Dollar weakness should equal gold strength and we did not see that today. The 1 day hold in GLD killed the momentum and the IV.