Market Volatility Bulletin: A Crushing Week For S&P Volatility

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Market Intro


Earnings reports from health care heavyweights Johnson&Johnson (JNJ) and United Health (UNH), as well as financials (JPM) gave US stocks the go-ahead for Tuesday morning gains. Energy (XLE) is the only sector down as the session opens up.

Spot VIX has gotten absolutely hammered over the past week, as trade woes apparently subside for the time being. The major large cap indexes (SPY, DIA, QQQ) are once again tracking toward the upper end of their ranges.

Thoughts on Volatility


A couple weeks back, concerns over the twin failures in the ISM Manufacturing and Service data releases had equities in a state of deep caution. Today we get a problematic print in the Redbook release, and on no small count due to the fact that we are heading into the all-important (for retailers) Holiday season.

A weekly measure of comparable store sales at chain stores, discounters, and department stores. Redbook tracks week-to-week change, month-to-date change, and year-on-year change with the latter the most closely watched reading. The report, produced by Redbook Research, offers early indications on ex-auto ex-gas retail sales. – Econoday

While political leaders (US & China, Britain & EU) are attempting to play nice, the concern is that the economic damage has already been done, as consumers read headlines about rising prices, tariffs, and new restrictions.

The IMF’s forecast for global economic growth for 2019 is quite dim. What’s more, historically the institution has overestimated year-ahead growth, and so the 3.4% global growth figure for 2020 may represent something closer to the upper limit as opposed to a baseline around which upside is pretty balanced with downside.

Note also that only in the United States does the IMF project 2020 growth to fall shy of 2019 projections. I wonder why this might be. In any event, it’s emerging and developing Asia (EEM, AAXJ) that are really driving the global economy forward.

I find this graphic quite interesting. Even as equity volatility has more or less fallen off a cliff, we see a pretty big divergence between the SPX and the junk-bond (HYG) space.

The scales (log-scaling on the left, linear on the right) may add to the overall sense of drama as to why the gapping looks so wide. But the fact remains that even as sovereign yields (IEF, TLT) have fallen, junk bonds appear to be flashing a warning sign.

Term Structure

ThinkOrSwim: 20d VIX chart

So here we go again. Spot VIX is looking to take another crack at the very low end of the past 90-day range. Above I’ve chosen to highlight the last month.

You’ll remember that after a turbulent August, September turned out to be quite calm. Then, with little warning, October opened with twin helpings of strong losses for the SPX. Now the narrative has rapidly altered course once again.

The jobs report, while not blockbuster, likely allayed concerns about the US economy going off the rails. The likelihood of another FOMC rate cut at the end of the month is pretty high. And of course the language between the United States and China as the two work out a trade agreement has gotten less charged.

We should pause and marvel for a moment though at just how rapidly the spot VIX index, and with it the front end of the futures curve, has bled off. Today is the last full day for the October VX contract to trade, and as such the M1-M2 contango is at a fever pitch – nearly 20%!

Once the Oct contract clears out, the November front month will be featuring some pretty heavy roll decay as it comes out the gate in relation to the spot index. The Nov-Dec contango will appear quite modest (currently 3.17%), but the wide gap between spot and Nov will challenge the nerves of VIX longs (VXX, UVXY).


For those who believe that spot VIX will continue to settle lower and lower (say, into the 11-12 range), then shorting near the front end of the term structure (SVXY) makes the most sense.

On the other hand, for those whose take is that spot is currently at the low end of its new range, and who see room for a rebound, shorting VX futures farther back on the curve carries potential as a play with some room for continued upside. Assuming you trade vol ETPs rather than the raw VX futures themselves, your instrument of choice in this instance would be ZIV.

ZIV frequently features less in the way of rebalance decay than does the SVXY, due to the fact that the volatility at the back of the curve is substantively lower than it is at the front. This even though the SVXY is levered -1/2 times, while ZIV is levered -1.

Wrap Up

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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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