Market Volatility Bulletin: Feel The Heat

Dec. 20, 2018 1:08 PM ETDIA, IWM, QQQ, SPY, VXX, XLC, XLK, XLU, XLY11 Comments3 Likes
The Balance of Trade profile picture
The Balance of Trade


  • US equities crater again as we enter Thursday's mid-day session.
  • While stocks are bleeding, the VX term structure has been rather stoic (I see this changing).
  • VXX implied vol levels are still priced quite reasonably.

Market Intro


US stocks (SPY, DIA, QQQ, IWM) continue to take a beating on Thursday after the comments from Chair Powell failed to carry the soothing tone that many market participants had hoped for.

Spot VIX is nearing a thirty-handle, picking up steam with each trading day. Investors need to learn to contend with true and persistent volatility in this ongoing episode.


Utilities (XLU) is the only sector enjoying a modest boost. Financials, while lower, are at least not leading the pack at this time. FANG-heavy tech (XLK), communications (XLC) and discretionary (XLY) are in the vanguard of this downbeat onslaught.

Thoughts on Volatility

What shall we say of Powell? For my part, I think that he is left with the task of doing what Bernanke should have been doing back in 2013, which is getting central bank policy out of crisis mode.

Rates are still only in the 2.25-2.50 corridor, very low for a GDP growth rate with a low three handle and a U3 unemployment rate below 4%.

Chair Powell is creating distance between himself and his predecessors. In so doing, he creates a more independent Fed, and also one that is less inclined to ride to the rescue of risk assets.

The action in stocks over the past few sessions has been brutal, no question there. The above visual from Dave Bergstrom displays what an anomaly the last few days have been.

Bulls cannot maintain an uptrend seemingly for any more than a few hours. At this time, it is important to remember that volatility on its own is an intrinsically symmetric concept, which is to say there is room for meaty upside so long as VIX trades near 27 (as it is right now).

Feb 5 was different. One could very well argue that in early February, it was the skyrocketing VIX that caused the SPX to drop. Now, the vol markets are more settled, even if the levels are higher. Also, it would be difficult to imagine the Fed meeting (with high visibility that rates would be raised) to cause a swift doubling of spot VIX from call it 23 to 46.

Term Structure

Thursday's term structure looks much the same as yesterday's, with a slight boost higher at the front end. My opinion is that the front end is going to become increasingly untethered from the more stable back end, and that we are going to see a rather fitful VX1 and 2 that flow more fluidly with spot.

VIX9D trades basically on par with spot at this time.

MarketChameleon: VXX implied volatility

VVIX is starting to stretch out from the very low levels we witnessed in early December. This suggests that the term structure itself is priming to become more volatile, but at this time is still within a pretty typical range. - VXX Implied Volatility

VXX implied volatility is rising modestly, but nothing particularly special at this time in comparison to the rest of the year. The ETP has recovered its losses back to mid-April, and the roll yield between the M1 and spot VIX is quite favorable to a long VXX position.


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The Balance of Trade profile picture
Adam Zingg, CFA offers both practical and theoretical perspectives that will benefit readers who wish to learn more about how to execute  on views or strategies that interest them.  Whatever your overarching philosophy or expertise, I believe there is value in understanding how trading works. This is perhaps especially true for investors, who often take a more philosophical, less mechanical view when it comes to their processes. It is not my goal to:1) convince you which side of the market to be on2) establish your trading time frames3) have you directly follow any specific trade ideasInstead, I aim to demonstrate how complicated sounding ideas can be simplified and accessible.  My hope is to grow your tool kit of resources, and give you healthy confidence to execute your own personalized strategy.  Trading and investment are fascinating, applicable across a wide variety of fields and disciplines.  Greater focus on targeting, execution, and exit strategies build transferable life skills.  In reading my work, it is my goal that you will consistently glean useful insights and build skills that enhance your ability to trade and make important decisions.

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.

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