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A couple of days of selling and there was almost a mini-panic. VIX traded over 15 today on the biggest run in two weeks. While it backed off some on the close, at midday it was humming. The thought of a good payroll report (NFP) and the end of QE3 is putting the fear into the 1800 SPX. The last Taper fear cost us around 4-5% in the spring.
One interesting thing to come out of the market today was how unimportant today's action is relative to the next few weeks. On the most interesting SPX movement day in some time, take a look at how the VIX curve moved
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.
The hopes of the weekend budget resolution faded this morning only to be resurrected by midday. The debate over the budget is turning the global equity markets into one big binomial trade. The two parties agree we rally, they don’t we crash.
If the stock markets are having a hard time, think about the volatility markets. One thing Black Scholes did not think of was the impact of liquidity on option prices. They thought about it, but it is really not in the model. The only proxy for liquidity is volatility in BS. Right now the volatility market is squishy like Jello. Jello looks solid but you can push you finger right through it and it wiggles when you move it.
Yesterday, we discussed how VIX could still drop quite a ways from its current level. However, that doesn't mean it made lots of sense to go short VIX futures or even SPX vol into this weekend. Take a look at the wicked move the VIX curve made from Tuesday the 8th to today:
Yes the VIX got crushed today. Dropping over 3% today as traders dumpped volatility and bought the market. The SPX had its biggest move since the 1st day of January in 2013. That being said, there could be a lot more room in this run. Think about this:
Yesterday, we discussed how there was a huge short squeeze on VIX and VIX products yesterday. We can see further proof that yesterday was a squeeze. Today, the SPX is actually down more than it was yesterday, yet the VIX is up less than 1.00 as I write this. One can see the difference in the dynamic of the move in SPX relative to the move in VIX.
Late in the day the broad market is up about .5% with the NASDAQ doing diddly since AAPL is in the toilet. While there was some positive news out on the Syria front it is hard to believe it was enough to drive equity prices to near record highs. I guess we can call it the Larry Summers Effect.
In the era of the Fed dominated market any news that keeps the liquidity pumps on is viewed as good. Mr. Summers, who would make a fine candidate, is not liberal enough with the extra dollars a Fed chairman needs to pump into the market these days. I guess that equates to a 1% rally at least until we gave half back.
The earnings season has been a mixed bag so far. Mark commented about it on CNBC yesterday morning and the fact that IV is not really taking off. VXX is making year lows today and the IV in the SVXY (Pro Shares Short VIX futures ETF) is making a 52 week low today. Even with VIX cash up the VIX futures compressed a bit. The only thing cheaper than the IV is the realized volatility clocking in a at 7.27 for the SPX. The low volatilities seem to set a table for something higher down the road but we will need a catalyst. The earnings season has not provided one and the muted movement is having an effect on the skew in FB.
Despite all of the news that seems to be hitting the wire every day, the one story not being discussed is the giant SCREETCH the market is making as it completely stops moving. While longer term measures of HV like 20 and 30 day are still measuring as normal, and are even coming in above normal, near term HV has completely crashed. The market has completely stopped moving the last week. Take a look at this chart from Livevolpro.