CNBC: 11:49AM EST
US stocks (SPY, DIA, QQQ, IWM) are trying to rebound after a recent, rather shallow, four-day losing streak. Real Estate (XLRE), Health Care (XLV) and Financials (XLF) are the sector leaders in today's session.
Spot VIX is flat as traders close out the morning.
Thoughts on Volatility
It's been a heck of a run so far this year... and really a pretty solid June for that matter; the SPX dipped to its low for the month on June 2 at a level of 2722. While the current roll-down in the index from its all-time highs achieved last week (close of 2954 on June 19) has been enough to keep volatility from sinking to its range lows, the equity dip is really nothing more than a pause.
I think there's still quite a bit of room for traders to sniff out SPX 3000. Recall that it did take a while back in late '16 for the Dow to clear 20k, which it finally achieved in late January of 2017 before launching higher into a banner year.
Not enough money on the sidelines? Perhaps. The state of M2, due to the unconventional policies of monetary bodies, has been so different that I'm always a bit skeptical when I see metrics that employ these kinds of data sets.
With my reservations out of the way, Mr. Feldman's indicator is flashing warning signs. While the lows shown in the graphic above may be alarming, I'd suggest that this is the natural consequences of low rates paired with high financial asset prices and decent investment opportunities in the corporate space. The visual does insinuate that there is not a lot of "cash on the sidelines", but I personally don't see any imminent cause for a liquidity squeeze (though I'm interested if readers take a different stand on the matter).
Passive investment vehicles have certainly benefited from a ten-year bull run marked by low volatility. Vanguard is an excellent firm that espouses an admirable set of ideals. Keeping costs low has arguably sent a much-needed wave of competitive price-cutting and cost consciousness throughout the asset management industry.
The explosion higher in AUM for Vanguard may in part be due to a sustained period of low volatility. It's definitely possible that the passive approach will manage to outperform the majority of active managers even in periods of swinging markets, but at the very least there's an impetus for investors to want something different than just keeping in step with the market.
Extended risk-return profiles create both an economic and psychological impact on investors that shift the investment landscape. As the trade-off between risk and return alters, investor perceptions about what constitutes an optimal management approach will almost certainly change as well.
June 2nd was the low in the SPX for the month, which coincides with the high-line for the VX futures curves pictured above. June 20th on the other hand marked the SPX at all-time highs, and we see the corresponding black line as defining the recent lower bound for the dates featured above.
Today's term structure sits in the middle, of these two boundaries, in good company with most of the other VX futures curves over the last month.
In relation to the last three years or so, this is a somewhat curious range for volatility to rest. Given that equities are stretching to new all-time highs, one might assert that spot VIX and the term structure should be trading substantially lower than what we're seeing.
What kind of value proposal is long-vol (VXX, UVXY) here? Well, one might propose that if vol had a mind to collapse, it would have done so already. Trade disputes don't seem to have the market down, and last week's Fed meeting resulted in new highs for stocks.
But check out the CBOE VIX9D index, which is jumpier than the traditional 30-day implied vol index. VIX9D only got so low as about 13 last week, and now rests a touch under 17.5. Arguably there's an upward trend there, and what matters more is the fact that there isn't a really clear impetus (beyond the four-day downward dribble for risk assets) why the index should be pricing as it is.
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'd be interested in what readers think about VIX9D refusing to give up the ghost. Why isn't vol falling? I welcome your ideas.
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 time frame, and so my trading activity centers around a negative delta for hedging purposes.