SectorSPDR: Friday close
Spot VIX printed between approximately 17.30 and 19.00 on Friday, and settled for the week just shy of the 18 mark.
Thoughts on Volatility
SectorSPDR: 5-day performance for the each of the sector SPDRs
All four of the major indexes closed the week above where they opened this past Monday. Along the way there was plenty of drama. Overall correlations rose in the implied vol space (we'll discuss below), but there was a reasonably wide set of outcomes at the sector level.
Perhaps unsurprisingly, energy (XLE) had the worst week, as energy prices (USO, UNG) tumbled. Financials (XLF) also had it bad, with dramatically falling rates and potential impact from the trade war.
Rate-sensitive portions of the market like real estate (XLRE) and utilities (XLU) fared well. When volatility kicks up, it can really make sense to check under the hood and see which sectors are ticking, and in which direction.
Thank you for the update, Urban Carmel. The last few days have been dominated by macro concerns, issues which in fact should not be taken lightly.
But it's good to remember that the on-the-ground reality for corporations is still pretty decent. Naturally, financial markets are forward-looking in nature. There are some warning signs of weakness, such as the lackluster Disney (DIS) or Netflix (NFLX) quarterly report. There is some margin compression, but sales are still growing at a decent clip, and consumer sentiment is still high.
That's not to say that we should wholesale ignore the pulse from the greater global economy, the antics in this tragicomedic trade debacle, Brexit, or the actions of central bankers the world over to ease in the face of data and deteriorating confidence.
There's room to safely argue that spot VIX and the VX futures are trying to balance the competing micro vs. macro forces that seem to be at cross currents with one another.
When the Hong Kong riots plastered headlines on Sunday evening (Eastern Standard Time) alongside the Yuan falling below 7 for the first time since 2008, US equities followed the world lower in a wholesale slide. Spot VIX popped up near 24, and has since retreated to 18. My view is that the macro story is still running the show here, and as such the highs of this past week are more than fair game over the next month or so.
But it's also worth remembering that between mid June and through most of July, HV10 and 20 were stuck in the 6-9 region. Spot VIX hovered quite high above realized vol, and the term structure held significantly even above that.
Now the term structure is pretty flat, but elevated to a couple weeks ago to be sure (at least so far as it concerns the front end). You get the all-too-familiar dip in the Dec ("Z") VX contract, which turned out to be one of the stormiest months of 2018 from a volatility standpoint.
There's a pretty wide gap between HV10 and HV20. I think that absent some exogenous shock (good or bad - both are certainly possible), the VX will be hesitant about wholesale movement outside of either the lower or upper band for the next month or so. I'm writing this more in relation to the front months, as the back of the VX curve rarely leaves that territory for long regardless of the realized volatility environment.
Implied correlations are a pretty important factor in calculation of spot VIX. Observe that this metric kicked up pretty decently (the index is the "KCJ") last week, and is already settling down some. Bear in mind that these are implied volatility correlations for the largest 50 individual components of the S&P 500; I believe the KCJ relates to implied vols on January 2020 options contracts.
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.
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.