Market Volatility Bulletin: Netflix Saves The Day (But Just For A Day)

|
Includes: AAXJ, DIA, IWM, NFLX, QQQ, SPY, SVXY, USO, VGK, VXXB
by: The Balance of Trade
Summary

Netflix likely was the proximate cause for bolstering US equities for the Tuesday session: you cannot build a recovery on that.

VIX down 14 consecutive days (close-close).

The bust in VVIX hints that the VIX won't be making any sudden news.

Market Intro

Netflix (NFLX) announced a price increase (13-18%) that caused investors to cheer, which arguably prodded US stocks higher (SPY, DIA, QQQ, IWM).

The S&P has now recovered from much of December's carnage. We're still a good 12.75% price increase in order to recapture the highs on the SPX seen in September.

CNBC: Tuesday after-hours (for Asian and European Markets)

The mood for European (VGK) and Asian (AAXJ) stocks was quite cheerful in their Tuesday session. Volatility is ebbing across a host of asset classes; spot VIX prints at 18.6 as of 2:15PM EST.

Thoughts on Volatility

That's an impressive beat-down in vol. Believe it or not, the VIX currently rests at about half the level it was just before Christmas, when the S&P bottomed.

US politics are at a fever pitch in terms of divisiveness. One's political opinions can impact their view on the economy and on markets. Really these belong in three separate bins. And if the three spheres share any true common theme, it's the need for humility and a desire for added perspective.

None of us knows what is "fair"; nor do we have all the facts about what's already happened, much less do we know what is going to occur. Size trades accordingly!

I don't know about you, but I have seen numerous metrics and visuals such as the one featured above over the last several years. One should always be skeptical when they're handed data (where did the data come from? What are the underlying assumptions?), but it is quite astounding how many of these companies for certain companies are free-cash negative.

Netflix is up today (for good reason), and has arguably charged the rally in US stocks. That said, we need to consider that one of the lessons of October-December is that investors decide for themselves what news matters and what does not, and this can change on a dime.

Term Structure

Tuesday marks the last full day for the Jan contract. As such, the M1 is hugging spot VIX quite closely, as tomorrow morning marks its cash settlement.

VIX9D took a plunge over the last 24 hours or so, and looks to indicate lower levels of near-term measures of volatility. Can the trend lower continue (SVXY)?

The VVIX is at an astounding low, tugging in toward 80. Look at the five-year chart above to get some sense of comparable lows in the VIX of VIX: historically this reading coincides with periods of prolonged calm.

I do not believe that the VVIX 'predicts' the VIX, but I do contend that it speaks to the relative size of the likely moves in the VX futures... and what we're seeing is a whole lotta nothin'.

Worth remembering is the fact that we're seeing a generalized spill in volatility across a host of asset classes (USO). This tells me that we're seeing high correlations in volatility structure, and that (contrary to what the VVIX is saying) that we could see a resurgence take hold fairly quickly. This is because some factor or story that jolts vol higher in one asset class may readily seep over into others.

Stories only matter (or don't matter) because secondary market participants say so; currently asset classes are acting chummy, and so contagion could grip easily in this environment (VXXB).

Wrap-up

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

Thank you for reading.

Please Consider Following.

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.