FB announced earnings tonight. While we saw some decent fire works out of AAPL, we did not see the same thing out of FB. The market was pricing in a move of about 7%. As I write this the stock has barely budged. The short strangle/straddle is goign to pay out extremely tomorrow, Shorts will make about 4-5 hundred dollars a spread. The payout is pretty clear below:
The weekend provided little real excitement as the Greek elections turned out worse than expected and no one cared. The leftists are in power but what they are going to realize is they have little choice. That seems to be the consensus from the reaction in European and US stocks. VIX managed to turn in a new short term low to close 15.58.
The news out of Russia is worse. The civilian population is suffering in the Ukraine again and Standard and Poor’s downgraded Russian Debt. In March of 2014 this news out of Russia would have tanked the market and sent the Russian equities into the tank. VIX could care less but the RSX did sell off after a recent rally.
The ECB finally announces a bond buying program of their own. We will call it Euro QE. At the rate the Euro is crumbling there won’t be much left of the bond buying program in dollar terms as the Euro rushes pack to parity with the US dollar. Stocks love the QE since they takeoff after a whiff of it is announced.
Witness the 5 day demise of the VIX. The near 23 handle on Friday last week was reduced to 16 today. At least in the short term the big moves we have had in 2015 should start to subside. It is hard to remember the 8% realized vol markets of 2014 since we have averaged over 14% since the beginning of the year. Intraday realized is even higher.
In August of 2013, the day the VIX of VIX settlement also happend to be the day of the a FOMC announcment that many thought might be when they would announce the beginning of the end of QE in the US. The night before the VIX cash settled 14.91. With little to no movement in the SPX. the VIX opened up much higher and settled to almost EVERYONE's surprize at 16.42. A huge pop. Check out the intra-day range the index had.
Any domestic news today was overshadowed by the Swiss pulling the currency peg on the Euro. The old 1.2 SWF to Euro is gone as the two quickly swung to parity. This led to a rip in the Swiss stock market to the tune of a 10% drop. To put that in perspective the SPX would be down 200 handles on the open for a move like that.
I am not sure what the confluence of news was that made folks nervous but it seemed to be a combination of retail sales, no ECB QE and the latest weak data out of China. That was enough to drive VIX into the 23 handle briefly and set the VIX future curve backward to Aug. We did get a close of Jan VIX close Aug however. The vol traders could not hold the Jan too backward overnight. They could not push it lower however so a little more movement is still expected.
There are many people smarter than us calling for a new vol regime. While we are not 100% sold that is the case, we can say with certainty that a VIX with an 11 handle is going to be very difficult to get to in the next few months. Why? Realized volatility. The market is moving again, something it did not do for months on end. Take a look at 10, 20 and 30 day HV relative to SPX implied vol.
2015 is starting off as the year of many swings. For all the big daily moves in 2015, equities have not really gotten anywhere. The post-FOMC rallies are fueled by the notion of lower rates and we run. Then the sad realization of why we need lower rates hits and we sell off. The only think I can say for this year is that the swings are solid and VIX is off the basement floor.
If VIX is the 'fear index' (it isn't) then today was actually quite worry free. While the SPX gave away almost 2%, the VIX barely moved rallying only a touch over 2 points and settling below 20. Recall that coming off a weekend the VIX SHOULD be higher by .75-1% anway. What does this spell? Take a look at the chart, when I am watching VIX and SPX I always look for divergence... times where the SPX is low and the VIX is low too.