Market Volatility Bulletin: S&P Dutifully Drops In Solidarity With Other Indexes; The Real Issues Are Likely Yet Down The Pike

by: The Balance of Trade

The week has been unkind thus far to Asian equities, but intraday recoveries in US stocks paint a picture of a group less inclined toward worry.

With inflation heating up, when will the bond market begin to signal that it wants a more hawkish set of central banks?

Long vol finally enjoys a good day… give some thought to selling the spikes, as vol is quite unlikely to just tear higher.

Market Intro


Sector SPDR

While the CNBC headlines argue for a poor showing for US stocks (SPY, DIA, QQQ, IWM), as we'll see below Tuesday is every bit as much a story about recovery as it is about downturn. Note the disparity between the Dow, shedding about 1.25%, vs. the Russell that appears to be more or less going through the motions of pretending to care amid the global rout. Spot VIX has gotten some life, on the last full trading day before the M1 expiration at tomorrow's open.

The TNX is making another push to the low end of its recent trading range. This is a fascinating market right now with some pretty fierce headwinds blowing in both directions. Treasury vol does not see it the way I do - still resting below 4%.

Thoughts on Volatility

Trade has been one of the major volatility themes of the year - certainly the most lasting of them anyway. With the Russell 2000 and the NASDAQ acting as pace setters for US stocks, the question really boils down to whether these averages can shrug off the bad news that surfaces with regularity.

The S&P made a handsome after-hours rebound off the 2735 mark even as Asian markets roiled. So a breakoff effort among traders are underway to stay focused on positive economic data and fundamentals.

Without question, central banks would like to keep animal spirits high by taking a very gradual approach to fighting nascent signs of inflation and winding down historic levels of monetary intervention. For the time being, stocks take this as soothing news (SVXY). The question is how long bond markets (IEF, TLT, AGG, BND) will sing the same tune. If inflation kicks higher, then bond participants may very reasonably call for a much more hawkish tone from Fed officials, which may provide for a very different market environment (VXX, UVXY).

Good idea, CBOE! Telling people what the indexes measure in a more explicit way is a good idea, and will invite outsiders to reference the less popular indexes to gain a better sense of what signals the S&P options market is sending with respects to predictions about volatility. As we'll see below, Eli Mintz has already made the appropriate changes to his important website.

Term Structure

The S&P's intraday rebound on Friday led to a collapse in 10-day HV. The nine-day, spot VIX, M1, and M2, all inhabit pretty tight territory (M1's last full trading day is tomorrow). We've witnessed plenty of M1-M2 contangos of 12% or more when M1 is this close to expiration. The gap between 20-day HV and spot (4 points) exceeds the gap between the back month and spot (3.5 points), which suggests reticence on the part of the futures market to follow realized vol quite so low.

Looking at the last month or so, one might reasonably argue that Spot-F1 roll yield got a little out of hand. This was entirely a function of realized vol (as seen in the prior graphic), so I'm not saying that the VX market somehow underpriced the market. But even in a calm environment, we need to account for some bumps that justify higher price of vol.

TVIX finally gets some relief after so many of the year's gains evaporated. There are enough crises burning, and a reasonably unbalanced S&P to boot, that could give this asset a boost through the upcoming summer weeks.

Overall though I think the market wants to own the recovery story. There's some technical resistance at S&P 2800, but stocks really do seem determined to look past troubling issues and see the good. I make that statement just as the confluence of how I read news flow, market action, activity in the vol space.

For those holding long vol positions, I'd say that selling rallies will give you plenty of times to buy back. I should warn that my crystal ball is out at the shop, but I think that even a push higher will have a lot of see-sawing with some pretty meaningful plunges over rather short bursts.


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I recently released a piece on volatility in the consumer discretionary sector. I'll do some follow up here over the next couple days on the topic, but wanted to bring the work to readers' attention.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I actively trade the futures and options markets, potentially taking multiple positions on any given day, both long and short. I also hold a more traditional portfolio of stocks and bonds that I do not "trade". I do believe the S&P 500 is priced for poor forward-looking returns over a long timeframe, and so my trading activity centers around a negative delta for hedging purposes.