Market Volatility Bulletin: VIX Prints 65 As U.S. Stocks Down Around 3.75%

Mar. 27, 2020 12:36 PM ETDIA, HOMZ, IWM, QQQ, SPY, XLF2 Comments
The Balance of Trade profile picture
The Balance of Trade
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Summary

  • The situation is constantly in flux these days, and spot VIX is hanging in the mid 60s while that state of affairs remains in effect.
  • We really may have hit the bottom; it's possible, but try to distance yourself from the last decade as you weigh the facts.
  • Take the overall current level of volatility into account while making buy or sell decisions on what you may consider to be attractive investment opportunities.

Market Intro

CNBC: European Indexes Friday Close

As of 11:45AM EST, spot VIX is printing 65 vol points. The prior string of gains may have added to a sense of hope for a sustained recovery, but implied volatility is sticking to the thesis that optionality remains highly valuable in the present.

US stocks (SPY, DIA, QQQ, IWM) are down in tandem about 3.75 percentage points as they enter the noon hour and prepare for the close of the week.

Thoughts on Volatility

Policy response thus far can be considered muscular, relatively swift, and coordinated between nations, as well as from the perspective of monetary vs. fiscal stimulus.

Naturally individuals with differing political objectives and perspectives can only agree with one another so much. But so far, risk assets appear impressed.

The larger question outstanding is whether and how it will work. In an election year, the warring parties can only play ball and cooperate with one another to the extent that it remains in their own platform's best interests to do so.

This is the sense that I've gotten as well, Matt. The mood has brightened by a lot. I have more to opine on the matter in a future dedicated piece, but for now I'll say that investors have had more than a decade to learn in the massive power of the "V-bottom", where stocks bottom out and decisively launch back on to recovery.

Never say never, and I wouldn't personally start making direct bets as to how long the stock market recovery lasts.

I will say, however, that the rally was built on sustained low volatility and slow-but-increasing economic growth. Each of these pillars is currently missing, and so I have my suspicions as to how sustainable the rally actually is.

The current crisis did not originate per se in the housing (HOMZ) or the financial (XLF) sectors of the economy. Still, that does not exempt these two major players in feeling the sting.

Visuals like the one above remind that some secondary markets are arguably closer to the supporting primary market activities than others. When secured lending on baskets of (non-agency) mortgage loans falls off a cliff, investors want to exercise caution before calling for a bottom.

Term Structure

I stated in the intro that the S&P 500 is down about 3.75% at the moment. That's more or less par for the course, and more to the point it highlights just why vol has not been all too eager to drop too precipitously, even as equities rage higher.

64 vol points annualized renders 4% daily moves a more or less one-sigma event. Volatility traders, be they in the VX futures markets or in the SPX options pits, may incline toward a view that the levels of volatility are set to calm down, but the equities themselves are still not calming down.

Now I must confess that I am rather amazed at just how sustained this level of market activity has become. But it is what we currently observe, and spot VIX (as priced by SPX options) appears to take the view that on a 30-day basis, this will remain the norm.

MarketChameleon.com - XLE implied vol (teal) and realized (purple)

A quick word on getting selective here. It is true that there may be some babies being thrown out with bath water. But I suggest checking out on your own online platform, or some other information provider, what the implied vol readings are before you press the buy or sell button.

Furthermore, consider your overall appetite for taking risk, across all holdings. It may be the case that there are some appetizing deals to be had, but you have to weather whatever the market throws at you; it rarely decides to turn higher or lower just because some particular investor decided it was the right time to buy or sell.

Wrap Up

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This article was written by

The Balance of Trade profile picture
4.15K Followers
Adam Zingg, CFA offers both practical and theoretical perspectives that will benefit readers who wish to learn more about how to execute  on views or strategies that interest them.  Whatever your overarching philosophy or expertise, I believe there is value in understanding how trading works. This is perhaps especially true for investors, who often take a more philosophical, less mechanical view when it comes to their processes. It is not my goal to:1) convince you which side of the market to be on2) establish your trading time frames3) have you directly follow any specific trade ideasInstead, I aim to demonstrate how complicated sounding ideas can be simplified and accessible.  My hope is to grow your tool kit of resources, and give you healthy confidence to execute your own personalized strategy.  Trading and investment are fascinating, applicable across a wide variety of fields and disciplines.  Greater focus on targeting, execution, and exit strategies build transferable life skills.  In reading my work, it is my goal that you will consistently glean useful insights and build skills that enhance your ability to trade and make important decisions.

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.

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