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.
Somewhere between the ADP report on Wednesday and today’s NFP report the nation found a bunch of jobs. The broader markets also found themselves in record territory with NASDAQ making at least multiyear highs. What I find heartening (for bulls like me) is that the Treasuries are finally weakening with a near 3 point drop today. If the rally has to continue folks need to stop running to no-yield bonds. With better jobs news the need for the Fed to buy more is a much tougher case to make. The thing is we have .75% gaps in the SPX still and while the realized volatility has tailed a bit we are getting one to two days a week of bigger moves.
With the underwhelming ADP report the private sector is just limping along but improving slightly. At some point here now that stocks are near all-time highs the residual of the financial crisis ending can only propel things for so long. I mean that as earnings have climbed back up over the last 4 years stocks have had just fits and starts depending on larger macro issue (US debt rating, Euro, US Fiscal Cliff, Europe, Europe, etc) . 2012 was nice but 2011 was a wash as investors worried about the Euro. Now lower interest rates are powering stocks globally. For some reason that is not enough to jumpstart hiring by companies. My only guess at this point is the continuing government dysfunction is worryin
Looking at the rally Thursday on what I would say is so-so news I am reminded of the fact that over the last year most of the melting has been to the upside. The market has tended to take off like a shot with Fed easing and the BOJ declaring war on interest rates. The US market with a decent dividend yield is starting to look attractive all of a sudden. While I am still mild bullish it pays to take a look at how the market is viewing volatility in the near term.
We were closing a position in the SL today and it was a ratio put spread turned into a very cheap (.04) butterfly and my feeling was BBRY is not quite done. Earnings are coming out in the July cycle and some trades that have been working very well lately are the modified earnings plays. What do I mean by that? Well the idea is to own gamma and pay very little in theta for duration of the trade. It is what Mark Longo calls on the Option Block “juice for free”.
The market has thoroughly shaken off the jobs report from Friday. While I watched for some headline news today, there did not seem like a lot out to cause us to rally and press the VIX down to 13.19. Mostly a lack of bad news, and we rallied. A failed merger in Greece of some big banks, and the TLT actually fell off by a good clip today. I guess we have two days of bizarro action (see Friday’s blog).
The market had a bit of a reversal on Thursday for what reason I cannot quite figure out. Maybe politics but the economic news all week has been ok. Today there is the big shrug on the Sequester so maybe the politics will start to seep out of the market. One could hope. One name that took off on the close yesterday was Facebook (FB). FB spent most of the day in the mid-26 level only to ignite on the close to close 27.25. It was like all the sellers went home after the whatever deal was announced with MSFT. What it left at the end of the day was a really flat term structure.
Today we had good old fashioned follow through and as I write this the market is only down small on the day. VIX made a power move only to 16.27 and it looks like it will close in the low 15.20s. There is now doubt the market can change direction in a heartbeat if necessary and 1500 in the SPX looked like the sticky area. A stock that performed well all day was Boeing so let’s look.
One of the apparent things in a low volatility environment is how fast volatility can turn the other way. The Fed announced some split sentiment moving forward on what to do about the latest round of bond buying. The improving news in the housing front was largely overshadowed by what appears to be some differing opinions in the minds of the Fed governors. Either way the market did not like the news very much. Neither did gold or oil or anything that has an inflationary long delta attached to them. Market players were looking for a reason to sell off and a possible end to bond buying looked good enough.