SectorSPDR: 11:01AM EST
Stocks (SPY, DIA, QQQ, IWM) are in drop mode shortly after an announcement from Larry Kudlow that the trade deal between the US and China has a long way to go; Tuesday's State of the Union Address said as much explicitly.
Spot VIX is taking an uptick on the development. The index neared the 15-handle on Wednesday.
Thoughts On Volatility
It is worth mentioning that, especially internationally, unfavorable economic data has increased in frequency over the last two months or so. This industrial production figure is a swing and a miss in an alarming way.
Volatility is declining, but there's really only so many of these surprises a freely functioning secondary risk market can take before we head up to higher levels of vol if these data observations become less exceptional.
From a technical standpoint, stocks stand right at the former multi-year support line, that now acts as resistance. I personally don't rely too heavily on technical analysis, but anyone who has participated in markets (myself included) will confess that there does often appear to be a pattern in the way that assets rise and/or fall.
According to this particular index, there is an important test underway at present. My view is that if stocks can even just temper the absolute magnitude of moves over the next month or two, a recovery is quite likely.
Because of how unique the Fed's intervention was in this recovery relative to anything that came before, I believe we have to look at patterns and activity in the lending world with a strong sense of "this time it's different"... because in fact probably it is.
Liz Ann Sonders does a good job displaying the historical data here, and reporting an anecdote that was the exception to the rule, as well as stating the rule itself: tightening lending standards looks to precede recessions with fair regularity.
Spot VIX now sits just a touch below the M1 contract, which coincidentally expires on Wednesday morning. The term structure is gently rising at the front end, to flatten the overall structure, as markets dip.
Note how low the HV10 is at present. The S&P has recently cooled down its hemming and hawing to levels that are truly impressive in light of how raucous the previous quarter proved to be.
Some give-backs along the way are almost inevitable. The pattern du jour, however, corresponds to realized volatility pushing implied vols (and VX instruments such as UVXY) lower.
CBOE VIX9D Index
On a five-day basis, the shorter term VIX9D index has taken quite a bump higher. In comparison to what we witnessed at points over the last month, however, the current drop in equities is still being taken with a grain of salt.
For the time being, long vol players likely remain best served by selling the vol pops rather than holding on for the big sustained spikes.
MarketChameleon.com: VXXB Implied & Historical Volatility
Look at the one year option volume on the VXXB product! It would seem that this ETN has successfully taken the baton from its innovative predecessor, the VXX. These notes carry maturity dates, and VXX was retired at the end of January.
There was some concern that the transition to the new note (VXXB) would be fraught with complications. At this point, I think we have to score the migration a smashing success.
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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.