Thank you to all those who attended our Bear Market Trading seminar. Look for the March Seminar topic coming soon!
The Fed is continuing the modest tapering of bond purchases and thankfully ignoring the machinations in Turkey and Argentina. A stronger statement of course would be that they taper 20 billion instead of 10 billion. There were some hopes that maybe with stocks lower that they would ride to the rescue. That did not happen.
As 2014 continues with the not much happening award, there are some big mark downs going on in the volatility markets. Stocks are sitting around, but volatility in the volatility products are hitting some very low levels.
Take VXX turning in 38% implied volatility with NFP still to come on Friday. It feels like paper has all but taken out the possibility of a move in VXX for this week.
2013 was a blockbuster year for owning stocks. It was a good, old fashioned bull market that we haven’t seen since the mid 90’s or 2007. The most interesting thing is the bubble talk in stock prices. Folks forget where stocks came from. 2011 was essentially a flat year and combined with 2012 the move up was just average. In 2013 stocks started to pick up multiples as investors look for growth and specifically global growth. In 2011 and 2012 stock just did not get a growth multiple.
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?