This morning we had another continuation of the Cliff Dwellers saga. This is where the market participants watch and see what the Executive Branch and Congress are going to say and then hit the sell button. It played out it in great fashion this morning on the leftovers from the hardening position talk on both sides in our esteemed government. Note the brisk selloff in the SPY this am. The SPY touched 139 and then proceeded to rally 1.7%+ to close 141.54. What happened?
The market started off this morning with a small rally in the indexes and a small sell off in the volatility products. At one point I had the VIX down to just under 15 but it closed at 16.14 so the intraday swing in volatility was pretty solid. For this last week the realized volatility of the SPX clocked in around 8%+ on the 10 Day realized. I just finished doing the Vol Views show on the Option Insider Radio Network and Don Schlesinger suggested that with realized volatility so low it is hard to believe it can stay down here. There was some action today that means Don has good point. Maybe the move today in the VIX term structure gives a clue.
As I was giving the AM Vol Report today, many an option trader asked me about the price action of the VIX. Was the fact that the VIX was barely down but the SPX was up a huge sign of a market not 'buying into' a rally. Sometimes the answer is yes. I gave a great VIX webinar last month where I explained how I use VIX to help me trade S&P Futures, SPY, and other directional plays. However, today we are not looking at that situation at all, despite the ATM IV being flat: