There are two main ways to correct. One comes with a drop in the underlying price of the market. This is something we saw in June when the market fell over 5% from the top. The other is a time correction, a time correction is typically when stock or index sits in a range, while its IV sits, then the stock begins to rally after a period of time. In a holding pattern, when IV rallies, typically there might be a sell off.
Right now, the current SPX holding period does not look like a sell off, the VIX is in a holding pattern along with the SPX.
It appears that the movement in the 10 year note has stopped being completely crazy. However, this does not mean that movement has stopped all together. In fact the 10 year and 30 year are both moving at a nice clip on a daily basis. The 14 day ATR on the 10 year is still WAY above where it traded before the ‘taper talk’ began. Looking at ETF’s that ATR of TLT is about 1.25 a day over the last 14 days. Yet, take a look at the 30 day IV chart of TLT
Our COO discussed, remotely from Detroit a trade in Ford Motor Company today. Watch the video here:
The basic jist of the trade is that the stock is at a 52 week high, and while IV is also elevated in the earnings months, it is not especially high ahead of earnings. July12 and July20 are both somewhat cheap and have a flat term structure.
There are plenty of people who do not love GARCH HV measures. I am one of them. However, they are still good for showing clear examples of how much the market has been moving. An even better volatility study though is Average True Range or ATR. Currently 14 day ATR in the SPX is over 20. That is SKY HIGH.
10 Days ago we posted on this blog that bond volatility was completely in the toilet. In fact, it was the lowest level we had seen in 2 years. You can read the piece here. We thought that the TLT might simply continue to drift lower. In fact just the opposite happened. Take a look at the pop in TLT Vol that we have seen in less than 10 days.
As the SPX continues its rally though 1630 and toward 1650, may a novice is asking why the VIX isn’t touching all-time lows. The answer is simple: volatility
When the VIX got to its recent low realized volatility was in the toilet. We had been through about 2 straight months of nothingness. 10 Day HV was near 5 and both 20 and 30 day HV were near 10%. Looking at HV now we can see a clear difference. 10 day HV is closer to 10% and 20 and 30 day are actually trading at a premium to VIX.
One of the things talking heads are constantly pointing to is the low VIX. It is 'complacency' they say, because that is a buzz word. The fact of the matter is the VIX is not cheap; the VIX is trading at a HUGE premium to current market volatility. Take a look at this spread:
Much has been said of the 'low VIX' right now. I would question whether the VIX is really that low. Consider this, the last 10 days, the market has moved at a less than 7% annualized rate. Over the last 20 days, the movement has been about 11%. Even 30 day HV, which includes some of that mess from the Election, is near 13%. Yet, VIX is near 16%. Take a look at the way it looks on a chart from LiveVolEx
For the second day in a row, we have seen the SPX break a significant 'technical' barrier. Yesterday the SPX failed to hold 1400; today the SPX on another decent sell off broke the 200 day moving average. To some this would be considered a MAJOR bearish sign. Yet I think it could be different. Below you can see a chart of the SPX and its ugly day.