Suffice it to say that the pressure on the market usually leaks out in various ways. We are not going the Jello route today but continuing on a theme of building pressure. Last week a lot of air went out of the volatility balloon and today it is running back in. If you bought the VXX straddles we mentioned yesterday you would be hedging the upside deltas by now.
The front 3 months in the VIX futures are backward. That is a sign of a move in VIX to come. We noted yesterday that the market for volatility was very thin. VXX Oct IV is up 17 point and Nov is up 12 points. The move in VIX is far and away over pricing the current move down in the SPX. Volatility is in another runaway situation.
Today was just a good old rollercoaster ride in both the SPX and the VIX. There was poor unemployment and ISM reports and that added to the gloomy Washington slime that is coating stocks. The good news is that bad news is bad again. The market is starting to look at bad economic data as bad for stocks as opposed to bullish for more QE
More fumblygook, new word, out of the Fed where there is a little he said/she said over the direction of the taper. As I write this, the House of Representatives passed a spending bill without funding for the new health law which should shake things up a bit in the Senate. All of this has some consequences for volatility.
Look at the IV30 for VIX this morning. It is pretty much trading at a year low. Look at the volatility spikes during the last two budget debates. I think IV is going higher and the volatility futures think so too.
With 30 minutes until the end of the trading day we are looking at a very confident market. I commented in the blog yesterday that there was substantial confidence going into the FOMC today. Of course I underestimated the confidence. All those folks sitting in cash are swearing at their statements today.
The Fed is worried we are not growing fast enough and wants to keep the little economy that could chugging along. My stocks are not complaining. From the Fed’s point of view if you love buying T-bills at 1.7% you really have to love them at 3%.
As for now midday in the market, stocks are taking a breather after their breathless rally yesterday. As I watch not much has changed from the close as investors still like what they see just not as much. I think with the market around even that is probably a small cause for the bulls to make their case. The VIX is down .08 and the weekend is slowly dripping out the premium. We would probably be up if it were not for BA.
What a difference a day makes. The relatively subdued moves yesterday gave way to an explosion after the close when the market decided Big Ben has some teeth left after all. I will call it his reiteration of a reiteration of Fed policy. The market liked the way he spoke live as opposed to the dour old minutes they released. Either way the market loved it. Did the volatility love it?
I guess the little snapshot on the blog says it all. For the last two years the market has been at the mercy of the next Fed announcement. “Are they going to save us again?” Like the big spider in the picture all market players are under the dominion of the FED. At the same time I am going to give credit to Big Ben because this is the first non-action after a Fed meeting release we have seen in quite some time. He might have pulled this off. The market is getting use to the idea of higher rates, maybe, in the future and the end of support by extended bond buying is now in range.
There was a lot of touchiness this week waiting for the NFP. As it turns out the number was ok even with the unemployment rate making a small uptick. Stocks caught a bid and are starting the slow grind back of possibly regaining some of the highs we saw just a couple of weeks ago. What is hard to believe is that VIX hit 18.6 yesterday early in the morning and it is now trading 15.49. That is a more than 3 point drop from the highs. It also says a lot about near term implied volatility.
Well the Yen is in the can, the Treasuries are dumping and everything that glitters is a dud today. Stocks though are mostly mixed while the volatility market is about flat to slightly up in the VIX futures. As a continuation of last night’s blog I think our summer will be the Zone of Unintended Consequences. I don’t know in modern history if a currency has been able to debase it’s way to glory (see Zimbabwe, Brazil in the bad old days and of course Weimar Germany). Maybe this time it is different but the by looks of the other Asian markets today they do not like the result. Let’s get back to commodities and specifically coffee.