Market Volatility Bulletin: Talk = $$$ (In The Present Era)

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Includes: DIA, IWM, QQQ, SPY, UVXY, VXX, XLK
by: The Balance of Trade
Summary

Fedspeak and assurances from China has S&P trying to retake the 2800 line.

When the economy changes, the Fed should change its policy and messaging; but the about-face over the last eight months is arguably unwarranted.

Treasury VIX is quite high, and NASDAQ-related options may be a way to get a different kind of vol exposure here.

Market Intro

SA

CBNC

CNBC: 1:37PM EST

Stocks (SPY, DIA, QQQ, IWM) have enjoyed a positive spat of statements from the China Commerce Ministry as well as from Fed Chair Powell that were risk-asset positive.

Spot VIX declined by about 8%, still managing to sport a 17 handle.

Thoughts on Volatility

That's quite a record, to say the least. A big part of this is the fact that the Bloomberg Commodity Index includes the interest earned on the collateral posted for futures used:

Bloomberg.com

Low rates carry a sweeping impact across a wide variety of financial products: some obvious, others less so. The longest equity bull market on record doesn't hurt the long outperformance of stocks over commodities either.

Low vol coupled with low rates and inflation have made stocks the clear winner over commodities. Obviously, this state of affairs will not continue indefinitely, and it may be worthwhile to scout out methods for trading and/or investing in raw materials.

That's just it: nobody, but nobody, can see the future. This goes just as much for the luminaries at the Fed as it does for anyone else.

In one sense, it's not fair to cast too much blame on Fed officials for their backtracking ("When the facts change, I change my mind. What do you do, Sir?").

But the messaging shift from the Eccles building has been pretty dramatic, especially since we are still in an economic expansion and corporate defaults remain quite tame.

My view is that the Fed does not have much of a stomach for making the wrong kind of news: news that generates market volatility. December was their signal that there is no exit or normalization of policy that markets will tolerate, unless it be exceedingly gradual and under the best of economic circumstances.

Too true. Volatility is the dispersion of returns; the "drift term" (up or down direction) is perfectly irrelevant in theory as to the computation of volatility.

Markets got this right in late December. Vol was quite high, and the SPX did in fact rocket higher. Score one for markets!

It's important for those who trade in the vol space to keep in mind what volatility isn't. Good job bringing this to our attention, StockCats.

Term Structure

Current VX futures curve (in blue) is down considerably from the session highs, which were comparable to Monday's close.

VIX9D now rests about a quarter of a vol point below spot VIX, hardly noteworthy, but I'd keep an eye on this gap to see if VIX9D comes to beckon VIX lower.

Since mid-April, the VIX of the 10-YR UST has spiked dramatically. Granted the index is only printing a smidge over 5, but that's a large percentage change on a pretty stable product for only six weeks or so.

"High" Treasury can often act as a destabilizer for equity, and prod SPX vol higher as a result. In Jan '18, Treasury vol picked up before the Feb 5 VIXplosion; arguably the red-hot jobs number reported on Feb1, 2018 acted as the proximate cause that pushed equity vol into an abrupt increase.

The Treasury landscape honestly favors the long-vol position (VXX, UVXY) at this time.

MarketChameleon.com: QQQ IV (green) and historical vol (purple)

NASDAQ vol may take longer to settle down than SPX vol. It goes without saying that vol on the QQQs is nearly always higher than vol on the SPY. With action continuing in the tech sector (XLK) while the broader SPX looks to settle, it may be worthwhile to shift your attention to this distinct space.

Wrap Up

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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/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.