It looked real ugly this morning toward noon. From what I could tell there was enough decent news to push stocks higher pre-open and then the flood gates of selling opened, hitting the momentum stocks particularly hard. The on again/off again saga of the Russians camping out in the Ukraine is putting the market into a tizzy. A near term weak market gets downright ugly when the liquidity dries up after countries start shooting at each other.
A topic that is consuming the Pro Chat group at Option Pit has been the relative stickiness of the VXX lately. There was finally a break in the product over the past few days, but for the most part VXX has decayed much less than expected so far this year. I won't trouble you with the whys, but much has to do with how the VIX futures are acting. They just don't decay like they used to.
For the first time in a while the VIX is getting smoked with a jump in the market. I don’t think it was Paul Ryan’s balanced budget proposal, but it probably did not hurt. Stocks did not get the crazy 1.5% move on no news, but a solid .60% move. That in general proves to be the volatility crusher, as slow but steady gains bring in the put sellers and start the risk train rolling again.
Unless I am mistaken, the new Fed Chairman lobbed the interest rate bomb over the market yesterday, and the initial reaction was sell, sell, sell. Things settled down today a bit but there were still some scars. Bonds did not really move much, which is due more to the new geopolitical uncertainty around new Czar Putin. No one is in a hurry to leave them. Markets have come full circle from last year when the Fed started hinting exit. Between Federal belt tightening and the Taper, stocks have done nothing but rally. So why can’t the VXX decay?
The VIX kept winding its way higher and skew keeps winding its way higher. Stocks in general today were a mixed bag, with the SPX down .3% or so. The darlings got hit (FB, PCLN), but a good chunk of stocks were up on the day. It is tough to justify today’s VIX on today’s equity movement.
The panic rise in the VIX is from what might happen come Monday. See here how the VIX cash spent most of it day running and then selling off, only to get running again and level off into the close. A 1.6 point move in a 16.22 VIX with a .3% SPX index move is a signal for a good size move, up or down.
I guess the Russians not invading the Ukraine is enough for new all-time highs in the SPX. I have not gotten in the way of this market yet, and will not start now. The thing I am looking for is what is on the horizon that will make IV move next. Most likely that is the employment numbers this week.
After again flirting with all-time highs, intraday stocks took about a .6% dump this afternoon following the Fed Board minutes release. They are going to continue to the Taper and there were even some hints at raising rates sometime in 2015, although that was just a few hawkish voices. The market had already given back some gains, then teetered into the red for good. The VIX was bid from the morning, so IV seemed to have an inkling of a move.
More testimony leads to another flat day for the market. After the rally of the last 3 days a rest was needed. The strangest thing is the volatility crept into the market and is just as fast leaving the market. VIX cash was down .20 today and all the volatility products pretty much followed suit.
Stocks got a breather today with the SPX up just .10% to 1798 near the close. VIX somehow forgot about the weekend and should end up around .02 today. For the first time in a while, no news produced a market that did not sell off like the last several weeks. Stocks did not give back the low volume rally on Friday either. It feels like if the emerging markets yawn, stocks here do nothing, and there was a bit of that today.
There is little doubt that stocks are a different beast at the start of 2014. As we look at the VIX tank this morning, the index is getting to the magic number of 16%. That is a 1% move per day for the big SPX index. For 2013 the 360 day average realized volatility, take a guess, was 11.6%. The 10 day HV right now is almost 20%. Stocks have been smoking, mostly in the down direction.