Spot VIX is up a little less than a vol point, fairly close with where it began the previous session, on a raft of less-than-glowing economic data. Thursday morning is witness to some profit taking (SPY, DIA, QQQ, IWM) based on the impressive run-up.
CNBC: 10:16AM EST
The drop in existing home sales was, like last week's retail data, a fairly large negative shock relative to expectations. CNBC has more on the story.
Thoughts on Volatility
It certainly would have been interesting to attend the 'informal dinner' between President Trump, Chair Powell, and Treasury Secretary Mnuchin back on February 4th.
The leadership team discussed the state of the economy. Given how Trump has publicly criticized Powell's (former) stance on rate hikes, it is difficult to imagine that no political pressure was asserted by the president on the Fed chair at the private gathering.
Power politics aside, maybe the group need to be meeting more often. And I'm not saying that with respects to the stock market rebound, but because there are increasing signs that the economy itself is not in great shape.
Employment vitals are very strong, but then employment tends to be more of a lagging rather than leading indicator.
Retail investors tend to focus on questions like "how's the stock market doing?", which of course is an interesting and important topic for discussion. What gets less focus is bond market liquidity, but it can play an important role in risk appetite.
Certainly the initiation of the Fed's bond buying program in 2009 was a deciding factor in priming the bull market that survives even to this day. But bond liquidity started to diminish a good bit back in mid 2015 through early 2016. A renewed commitment from the Fed to hold off on rate hikes (alongside an avalanche of new liquidity from the ECB and the BOE announced in early 2016) provided the backdrop for a reinvigorated bull rally that may arguably still be under way.
The larger issue to my way of thinking is how much room the Fed actually has, or any of the major central banks for that matter. Do we now live in a global economy where 5% interest rates would spell major economic upheaval? This is a massive accident just waiting to happen.
For any number of reasons (both positive and negative), interest rates need the freedom to fluctuate to levels that compensate lenders for both inflation and opportunity cost of their capital.
A perpetual low-rate environment smacks of accumulating troubles that, perhaps ironically, only advances in technology may be able to solve.
Today's term structure of VX profile is modestly higher than the lows posted at Wednesday's close. The whole term structure notched up, with the front end taking the largest boost.
Note how much ground VX futures have lost since Jan 30th (each of the days featured above are Wednesday closes). Realized vol has cratered in the SPX, and the term structure has taken note.
That having been said, the move lower was fairly gradual - far less erratic than realized measures proved to be.
Skew is hanging mid-range with respects to the last three months, but in the low end in relation to the last year. August '18 saw the highest-ever CBOE Skew reading (around 158), and there was indeed a decent dip shortly thereafter (right around the Turkish Lira crisis).
I take the current readings as indicative of an SPX options market that is growing in nervousness vis-a-vis swift downside potential, but not to the point where upside is being meaningfully discounted. That is to say, I interpret SKEWX here to mean that the options market still sees decent room for upside. I also will go out on a limb and say this metric will likely get a very real boost should we make it much higher than the 2800 mark.
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.
I appreciate Robin chiming in the last MVB. Good call back in late December on the parallels. While the market action has shown Robin's comparison to be spot-on, I have difficulty finding great comparisons between Q3 '98 and Q4 '18. FWIW, there was a full 18 months or so between the resolution of 1998 and the true beginning of a prolonged bear market.
Thank you for reading.
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.