CNBC - 10:18AM EST
Spot VIX has taken the occasion to rise .65 vol points, despite the lack of movement in stocks.
Thoughts on Volatility
Being right, as opposed to doing right.
Nobody is perfect, and I am sure that this includes Mr. Bogle and Mr. Volker. It's fair to say that because of these two men, finance was able to make the world a better place.
Mr. Bogle gave investors low-cost access to diversification techniques, while Fed Chair Volker quelled the demon of inflation in the US by cranking interest rates higher, thereby showing investors and consumers that the Fed had both the will and the methods for combating rising prices.
One of the reasons it is recommended that traders start out their practice with phantom accounts is that people are frequently more interested in being right on a particular occasion than they are in following the correct set of actions that leads to disciplined asset management. In their own way (perhaps ironically in Jack Bogle's case), these individuals demonstrate the sense in constructing a reasonable action plan, and then plowing steadfastly forward.
We all need to keep in mind that a big part of what makes 2019 look so great is that Dec '18 was such a doozy of a month!
Falling rates led strong returns in bonds, and likely in precious metals as well. We endured some testy months, but risk assets benefited for the most part from a shift into risk-taking.
It is mathematically true that the US economy is as large as it has ever been, and so from that perspective it may be the "best economy ever". Unemployment rates are undeniably low. But GDP growth is not too strong, and one need look no further than the level of the Fed Funds rate to walk away with the sense that monetary policy is set to avert a pending recession.
I sometimes hear people argue that trading is risky, but that stock-picking is not. Any and every way of allocating scarce savings into capital investment (short or long-term) is risky; the risks just take on different forms.
As we'll discuss below, you definitely want to trade the market that's in front of you, or at least find the market you're looking for. In today's US equity market, that means trading in a low realized-vol environment.
Between Friday's strong NFP, the FOMC meeting, and several data releases (CPI, Retail Sales), spot VIX may be well justified in edging higher even as stocks currently linger. Remember the ISMs of October and even early December for evidence that data can move markets.
Clearly though, the Fed Chair Press Conference this Wednesday carries the greatest potential to send markets in motion. I am quite interested to see if volatility melts should the FOMC meeting fail to deliver any new twists to the current messaging.
As of Monday morning, the M1 was only a touch above spot VIX, with the M2 about 13% higher still.
The term structure has steepened considerably even over the last week or so. For those considering a short-vol position (SVXY, ZIV), there's quite a decision to be made between the front of the term structure or the middle-to-rear.
Long-dated vol has really not given in much to the falling levels of realized volatility. Should spot really and truly be gearing to head into lower territory (think 10-13 handles with regularity over the next quarter), then the back end of the term structure is arguably priced too high.
The VIX of VX futures took a quick spike in early December. Presently the index is channeling lower. It may be instructive for those who play volatility using options (say, on VXX) to consider the current trend.
If we head back to late October, it looks as though VVIX is trending higher. If, however, you consider that early December in the SPX sort of rhymed with early October, there's quite a bit of room to hit the bottom end of the channel within a couple weeks, which would argue for being a seller of vol options. Presently, that is my favored view of the situation.
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.
Well then, Dec 15 cannot come fast enough! We did see an 11-handle in the spot VIX as early as late November. It's instructive to see how quickly the apple cart was upset in early Dec, even if no sustainable catalyst for higher vol emerged (...emerges?).
Thank you for reading. Please consider following.
This article was written by
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.