Market Volatility Bulletin: Apple Smashes, But Indexes Soften Against Global Equity Setback

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Includes: AAPL, ACWX, DIA, EEM, EFA, IWM, QQQ, SPY, UVXY
by: The Balance of Trade
Summary

Will Apple become the first $1T company by market cap in US history?  If so, markets appear only mildly interested at present.

European vol hits 13-year low as measured by SX5E Index.

Spread between UVXY implied vs realized vol is widening: do these traders see a catalyst for change?

Market Intro

CNBC: Wednesday, 12:05PM EST

Will Apple (AAPL) be the first company to reach a $1T market cap? It seems as though there is a decent chance after the tech titan impressed the secondary markets with its most recent earnings release and guidance.

US stocks (SPY, DIA, IWM) with the exception of the NASDAQ (QQQ) are mildly down as this report nears publication. It seems that the sour tone of the international equity markets (EFA, EEM, ACWX) may be challenging domestic optimism relating to earnings season. Spot vol is up mildly, and S&P futures are down from the highs of 2826 achieved in the choppy overnight session:

Spot VIX once again achieved, then failed to maintain, a twelve-handle over the last twenty-four hours. This has become a recurring pattern over the last six weeks or so.

Thoughts on Volatility

I posted a visual on increasing Eurozone CPI last month, and reader atom&humber pointed out that rising oil prices likely accounted for the lion's share of the figures. Point taken. That said, ECB monetary policy kicked into hyperdrive in March 2016, right when oil prices were more or less at their bottom.

If policy was determined largely based off low-and-falling commodities prices, will there be some kind of symmetric response when CPI is moving upward, regardless of what particular factors are causing the increase? My bet is "no".

Given how across-the-board low volatility traded last year, it surprises me that implied vol on EuroStoxx 50 would only now be finding thirteen-year lows. The VIX of EFA currently prints near 11, which is definitely surprising. For those seeking long-vol opportunities, this may be a better place to look than in US stocks.

Matt Thompson implicitly asserts that the "Volmageddon" from earlier this year entailed something of a sucker punch not just to stock investors, but to the volatility community of products in particular. With dramatically lower short vega, it is difficult to think of today's environment as pointing toward some kind of repeat performance.

Term Structure

Welcome August! With the volatility profile of July having ended on a reasonably gentle note, I thought it would be good to remind readers how the VX term structure unfolding for the prior month. Note how high the VX curve was just before the Fourth of July, when saber rattling related to trade woes were still swaying markets. It can be tempting to assert that we've slayed this particular giant, but 2018 has shown that points of concern can resurface. My point: don't be paranoid, but also don't get too comfortable.

MarketChameleon: UVXY Implied Vol

The implied volatility on UVXY currently posts levels that are pretty "meh", given the change to leverage that occurred in late February (see more on this in the conclusion). What we do see is a widening gap between where vol on the product's options are diverging from realized vol (the purple line).

If someone is buying these options, they should be asking why they believe actual vol on UVXY is going to liven up over the next couple weeks or so. Otherwise these options look like a bit more of a sell than a buy.

About a year ago, a reader/commenter alerted me to the existence of the CBOE Implied Correlation Indexes (ICJ, KCJ, JCJ which rotate by year: CBOE has some good information on these indexes). Spot VIX bottomed in mid-June and once more in late July.

My observation of correlation between sectors is that I'm seeing something of an increase at the sector level. Correlation, realized and implied, is a major driver of volatility. Last year's index closed out in late November at 16, and this was a big reason for how implied vol for the S&P achieved such breath-taking lows.

Conclusion

If this is your first time reading Market Volatility Bulletin, thanks for giving it a try. If you're a regular, we thank you for your ongoing contributions in the comments section.

In the last MVB, iconstockkilledme ("iskm") references potential in the ETP UVXY. Obviously, by reading this, one may readily conclude that he sees upside for the product.

Later down in the comments section, iskm goes back and forth with another reader about the reduction in the daily leverage ratio that ProShares employs in relation to this product. I wrote an article on this topic shortly after the <sudden> deleveraging decision occurred.

Suffice it to say, there is indeed less leverage on the product than there used to be, but of course the leverage still exists. This is a good feature when (and only when) there is a lot of momentum or convexity. Also when spot VIX trades above the two front-month contracts, the product will benefit. A "buy-and-hold" for UVXY amounts to a call for such a movement to occur.

I enjoyed the opportunity to do a video interview with Dave Lincoln a couple weeks ago. We discuss international trade, central bank policy, a bear market in Chinese stocks, and a variety of other topics. Thank you Dave for your hard work putting this interview together, and for your innovative YouTube channel devoted to covering volatility in an informative and entertaining light.

Thank you for reading.

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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.