Market Volatility Bulletin: Are We Still In Opening Salvos Of A Bear Market?

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Includes: AAXJ, DDM, DIA, DOG, DXD, EEH, EPS, EQL, EWI, EWJ, FEX, FWDD, HUSV, IVV, IWL, IWM, JHML, JKD, OTPIX, PSQ, QID, QLD, QQEW, QQQ, QQQE, QQXT, RSP, RWM, RYARX, RYRSX, SCAP, SCHX, SDOW, SDS, SFLA, SH, SMLL, SPDN, SPLX, SPUU, SPXE, SPXL, SPXN, SPXS, SPXT, SPXU, SPXV, SPY, SQQQ, SRTY, SSO, SYE, TNA, TQQQ, TWM, TZA, UDOW, UDPIX, UPRO, URTY, UVXY, UWM, VFINX, VGK, VOO, VTWO, VV, VXXB
by: The Balance of Trade
Summary

U.S. and European stocks are on the rise, while VIX sinks to a mid-13.

Do private and public debt levels matter for risk assets?

Term structure is pretty flat at the back end, leaving open some room for doubt on the monster rally.

Market Intro

CNBC: 11:40AM EST

Asian shares (AAXJ) struggled yesterday, but European (VGK) and US (SPY) equities are on the rise.

The market seems to be discounting in a delay in the bungled Brexit process. Of course, if British lawmakers request a punt on Brexit from the EU, it is entirely possible that the EU will have demands of its own.

Thoughts on Volatility

...Maybe. I agree with Mr. Gundlach that the about face from the Fed has largely aided the recovery in stocks in Q1 '19. I also agree that the US is swimming in an "ocean of debt", and that there will be some pretty severe ramifications for this at some point over the next decade or so.

As I write this, I am listening to Led Zepplin's When the Levy Breaks (great song!). At some point, sovereign debt will quite likely matter in a big, terrifying way to investors. Timing it down to this particular market cycle seems ambitious. Besides, it's quite likely that it will matter in another major market such as Japan (EWJ) or Italy (EWI) before debt concerns claw deeply into US markets (DIA, IWM).

Basically good advice. I am finishing off a one-year contract teaching math full time at Scottsdale Community College; I also teach master's finance and economics students at Grand Canyon U, and my wife and I home school our two kids (11 and 13).

The current system, where kids transition directly out of high school and into college is probably not ideal either for students (not mature enough/ready), parents (paying a lot without getting a lot) or society (less prepared graduates).

I am hopeful that we'll see some important changes coming down the pike in education. In light of how high the public debt is, and how underfunded massive programs like Social Security are, loading students and parents with large education debt loads does not strike me as a great investment in our nation's future. Please share your thoughts on this in the comments section, especially if you disagree!

So what should our kids be doing? I'd like to see a move more toward associates degrees, coupled with apprenticeships. A former finance student of mine went right into trading out of school, and he's now in his third year. He has a decent capital base, plus he is single and has several roommates, which is to say that he has room for mistakes, setbacks, and the like.

The trading advice in the tweet above happens to be pretty good career advice generally. What kinds of waves you ride, and how long you stick with them, may be two of the key distinctions between trading and investing. But either way, keeping flexible and remembering that the market is oblivious to your existence can be sobering and helpful reminders in capital and labor markets.

Term Structure

I'd like to focus today on the F4-F7 contango; it's still pretty flat. Spot-F1 and F1-F2 are steepening out quite a bit, which may relate to the opening salvos of vol becoming more confident with lower prints.

This interpretation insinuates that the F4-F7 remains unconvinced about the current state of volatility, and the back end of the term structure awaits sustainable surges in realized SPX volatility.

In part, however, this comes down to the reality that the whole term structure is higher today than it was a couple years ago. So for instance, 11 is 10% higher than 10, but 21 is only 5% higher than 20. So the absolute levels make a difference.

The relative vigilance of the back end of the vol term structure may be well placed. Consider the impressive ramp-up in the spot VIX witnessed only last week.

The trick for the term structure to build up is the sustainability of VIX rather than periodic moves higher or lower. Spot VIX has given up about 4.5 vol points in a matter of a few days... hard for vol longs (VXXB, UVXY) to succeed in that climate unless they feather in and sell out pretty quickly on gains.

MarketChameleon.com: UVXY Term Structure

Wow, the UVXY term structure today sure is low relative to the last month and certainly six months ago!

Just because vol is cheap doesn't mean that it is an automatic buy. For those looking for a pickup in the term structure, some risk reversals (buy the OTM call, sell the OTM put) may be a good idea, keeping the profile somewhat vol neutral (depending on strikes and expiries).

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.

Silent Trader offered a couple really excellent comments in the last MVB, this being the first. The topic was about the human-tech interactive process and how technology can in some cases reduce risk, and in other cases amplify it.

ST's second comment in particular has some excellent details (gets more into logistics and remote piloting), so please do take the time to check out his thoughts.

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.