One of the odd quirks of the VIX, (to me anyway) is that when markets chase higher, or there exists herding behavior causing performance panic in the markets, the call implied volatility doesn’t act like put volatility and rise dramatically, causing the VIX to rise. I suspect that the reason lies in that there are always call sellers regardless of market conditions, but not always put sellers when things get dicey. Thus, no imbalance of supply/demand on call IV.

Yet, you can make a fortune due to this fact. Take a calls on the SPY for June for example:

The 170 calls for June 7th rose 200% or so today. If you bought an equivalent call three weeks ago, you would have turned roughly 10 cents into $5. Look at the 160 calls, obviously trading for at least $5. That return, depending on your expiration, would be around 5000% over the last three weeks.

So, low volatility in a market such as this gives it to you both ways, in uber-cheap protection and major upside participation. Straddles may be a nice option if you are waiting for an inevitable dip but want to ride the herd at a nice price.

Expiration for the futures is in one week:

That means that there is a five week option cycle coming up as opex comes before VIX expiration. That generally has implications for the market in the short-term and we will cover that later this week.

I apologize to readers for the sporadic posts. I’m dealing with the impending CFA exam, so the posts will be limited until after June 1st.

Now that everyone is comfortable with May being a breeze, let’s take a look back at how May 2012 unfolded…..

The market came back from a mid-month April dip to hit highs for the year on May 1st. On May 2nd, it tried to sell-off, but the buy-the-dippers were quite ready for action, and closed it higher than the open. It rose 50 or so S&P points in the last week of April into the first week of May. Look familiar?

Notice how the wicks got long in mid-May as the market battles induced wild swings.

The first two days of May are historically bullish for the market, coming in positive over 70% of the time. The same can not be said for next week. Earnings are over after next week, so the market is going to be left with the loneliness of the sour economy, and “the Bernanke’s” (still entertaining: http://www.youtube.com/watch?v=PTUY16CkS-k)  ability to prop it up. (More succinctly, give traders and investors the confidence that his actions enable them to feel safe buying stocks.)

Complacency is here in the VIX option market:

http://www.schaeffersresearch.com/commentary/content/blogs/does+the+latest+vix+price+action+reveal+complacency/trading_floor_blog.aspx?single=true&blogid=115883

And the VIX its itself just occasionally rolls over to murmur, then falls back asleep:

VIX Volatility Index values generated at:  05/02/2013 15:14:59

Short post today, as I’ve pretty much made it clear for a while where I think things are headed and what our positions are for the next two months. The focus today is squarely on volatility; if you can’t figure out what is happening by now to the global economy, then you aren’t paying any attention. All you need to know:

http://www.investing.com/economic-calendar/

Fear is not really a part of the game yet, as the VIX futures ticked a bit higher:

By now, after months of mini false alarms, the market is going to have to prove it to the downside to get the VIX charged up. That probably means getting the S&P below the 50 day and failing to get back above it. A drift downward is certainly possible. The VIX front month (VIN) and next month (VIF) month moved far more relative to the futures, but the S&P options weren’t pricing in vol like the futures were, so they were playing catch up today:

The VXX is holding roughly 50% of May and 50% June futures, so with the back month already at nearly 16, VXX holders are going to need a real move in VIX over the next two weeks to see a real spike. It is in no man’s land in my opinion to do anything with it. If the VIX back month could get to 18 or so, then VXX puts would come into play.

The worst days for May historically are next week, so the selling got  off to an early start. Usually, the market treats the first two days of May with kindness, yet a confluence of events on the calendar this year are making that difficult. The ECB tomorrow is expected to do more than just a rate cut, which is probably a useless tool anyway due to the under-capitalization of the banking sector there. If they stand pat, the markets could get more turbulent. Commodities took a serious beating, and like I’ve said in past columns that has some meaning, especially with the dollar not exactly a headwind today.

Outlook/Action:

Put calendar in FB for .18 at $26 for May1/May. When you have an IV spread of over 50, it just begs for this kind of trade.

Sold a DIA bear call spread at 145/146 for May for .77. The risk/reward on this is roughly 1 to 8. Looking for more of this type. Still holding IYT, QQQ, IWM, DIA, SPY, XRT, XLF, OIH puts for June. And short UTX and UPS bear call spreads. Of course, short VXX against all that.

Like I’ve said in past columns, it is very, very rare for May to be a good month when no negative month preceded it in the current year. In 1985 it occurred, but then again, GDP that quarter was 7.1%. We’d be lucky to get 1.7% this year. Who knows, the trend is not broken.

Another day, and another ridiculous number coming out of U.S. manufacturing. The Chicago PMI was the lowest since…..2009. Really?

http://www.marketwatch.com/story/chicago-pmi-slumps-to-35-year-low-2013-04-30?link=MW_latest_news

Meanwhile, the crowd of folks saying that May “might” only see a “1-3%” correction is loud. They cite that “everyone is hating the market”, but all these people are in. So, who is hating it? The “money on the sidelines”?

If the money on the sidelines is desperate to get into stocks, why are bonds going up?

Now, yesterday an analyst in Japan stated that shipments of cars to the U.S. are slowing. I can’t find a single data point to support this, but here is the quote cited by Bloomberg:

“Overseas demand gathered momentum in the past few months, but the pace of growth is moderating a bit now,” said Junko Nishioka, chief economist at Royal Bank of Scotland Group Plc (RBS) in Tokyo and a former Bank of Japan official. “Shipments of cars to the U.S. are slowing.”

http://www.bloomberg.com/news/2013-04-30/japan-production-misses-estimates-amid-weakness-in-global-demand.html

The consensus is calling for an ECB rate cut on Thursday, and even more measures to help the economy. So, logic would dictate that quantitative easing would equal a falling Euro. So, on cue, the Euro did exactly the opposite and shot up:

Consider this: What is a rate cut going to do to an economy when the banks are short of capital already?  Wouldn’t the banks just eat up the excess liquidity and not lend? Isn’t that what occurred in the U.S. until the Fed started outright buying financial assets? On that note, ECB board member Joerg Asmussen, the bank’s top official for international relations stated:

“Asmussen echoed recent comments by Draghi that the central bank would find it difficult to carry out monetary stimulus through the purchase of financial assets. A number of central banks around the world, including the U.S. Federal Reserve and the Bank of Japan, have sought to expand the supply of money in their economies in an effort to boost growth.

Asmussen said such methods were “not easily applicable” to the eurozone because the 17 countries have differing market interest rates and because companies tend to get their financing from banks, and not from bond or money markets.”

http://www.bloomberg.com/news/2013-04-30/japan-production-misses-estimates-amid-weakness-in-global-demand.html

Can you imagine if the U.S. printed a 2.8% decline YOY in retail sales? That is exactly what happened this morning in Germany:

Equity markets are not interested in any of this. What they appear to be doing is following a textbook seasonal pattern. April is right on the money, for what it is supposed to do. The April change in the Dow is just basis points from the historical average. A lot of folks are saying that you need a blow-off top to confirm the end of the rally, and that selling in May is not going to work.

You can have it exactly the opposite. This market can just roll over and die on seasonality, without any special event. Need evidence, just look at last year.

What special volume/event occurred in May 2012? How about in May of 2011? How about May of 2010? (If you answered the BP oil spill for 2010, you get partial credit)

This is either a K.I.S.S. moment, or the market will ignore bad data for a long time. I don’t have the answer, but puts are cheap.

If anyone is wondering why I haven’t opined much about VIX products lately, it’s because there was no action to be taken. The VXX is doing absolutely nothing. Buying calls using VXX is gambling (literally) whereas put buying on the VXX is not, and the opportunity to do that has just not been there from an asymmetric risk/reward scenario.  I’m sure some complex theta strategies are doing phenomenally well, but I personally do not engage in that, outside of occasional VXX butterflies which probably have been awesome trades lately. Those can be 5x+ trades on the weeklies with very low risk.

VIX futures:

Action/Outlook:

No action. Still eyeing XLE, DIA, SPY, IWM, XRT puts/bear call spreads and equity put calendars.

Today was an odd day. We got mixed data points, including an absolutely horrible Dallas Fed manufacturing index number that was so bad that I couldn’t find a lower number going back though 2011. Check out this chart:

http://www.calculatedriskblog.com/2013/04/dallas-fed-regional-manufacturing.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+CalculatedRisk+(Calculated+Risk)

So it certainly appears that the regional manufacturing indexes are signaling that the ISM may hit 50 this week. Should cause a rally in stocks, right? On a brighter note, pending home sales were up 7% over last year. You would hope that someone out there is interested in taking out a loan when the cost of using the money is barely above inflation. People don’t realize that a loan can become an asset if rates increase.

Banks just told everyone two weeks ago that refis are winding down and new lending will need to increase to fill up the earnings gap. Furthermore, businesses are not borrowing, they are pulling back and hoarding cash again due to weak demand:

http://online.wsj.com/article/SB10001424127887324743704578443130749674850.html

This is the odd thing about the market these days, it appears to care very little about the economic environment. What about earnings?

Sort of an odd situation here. Earnings estimates were low-balled thus 70% of companies are beating, while revenues are declining. I don’t really know what to make of this, or how it portends to the next few quarters of earnings, while expectations are fairly high for the second half.

April tends to be strong for equities at the outset, weak in the middle of the month, and strong right here into the first couple days in May. Then, the market will be dealing with the push-pull of economic data versus global central bank policies. Folks seem to believe that the Eurozone will cut. But if the ECB cuts rates, that could be a headwind to stocks as the dollar should rise. That again translates to lower earnings next quarter as well.

It is going to get interesting to say the least. The volume on the SPY was the lowest since Christmas Eve today, save for two days in February. That is amazing. It’s as if the market is levitating higher and no one wants a part of it. Besides central bank activity, we have jobs and ISM numbers out this week.

The VIX is asleep ahead of all this:

VIX Futures:

VIX Term Structure of SPX options, not futures:

Outlook/Action:

Added a few SPY puts late last week for June. The implied vol on these make them a bargain. Closely eyeing some bear call spreads, like in XLE for example. Oil has not had a good summer for quite a while, and the sector is making another lower high right here.

We will be adding a real-time email subscriber service soon at a very affordable price, still to be determined, but under $60/month. If you are interested in receiving an email concerning this service, contact me at scott.murray1@gmail.com.

“If you torture the data long enough, it will confess to anything.”

Darrell Huff, How to Lie With Statistics, 1954

The “Convincers” are getting awfully loud these days. I saw Ryan Detrick, who has been bullish for quite some time, bust out a sample size of 17 first-year of new presidential terms chart today on twitter:

Really? Common sense, if not your college statistics class, should tell you how ridiculously insignificant this is statistically, in more ways than one.

Goldman Sachs is telling their Muppets to hold in May, because….ready for this? Global growth is ramping up! Can they say this with a straight face?

“Returns should be supported by a rebound in global growth, accelerating earnings growth and high-risk premia,” according to the Goldman strategists.

http://blogs.marketwatch.com/thetell/2013/04/24/sell-in-may-and-go-away-not-if-youre-goldman-sachs/

Wow, I need to borrow that crystal ball that they have over there. I actually follow the data and it is getting markedly worse, in both global economic metrics and corporate earnings and revenues. I hope the Chinese Wall wasn’t compromised in any way, as their top institutional clients dump into the pump.

And of course, perma-bull Jim Paulsen gets into the act with a “buy in May and be OK” commentary:

http://www.cnbc.com/id/100674872

Wow, why does everyone want to convince me to hold or buy in May? Here is a voice (Mark Hulbert) of reason with actual data:

Imagine an earnings season in which total sales revenue increased only marginally, while earnings fell. You wouldn’t think that scenario would be greeted with bullish open arms, would you?

Sales growth rates are also coming down: Total sales per share for S&P 500 companies for the last four quarters, for example, are only 3.5% higher than for the comparable period ending March 31, 2012. The comparable growth rate for the period ending the first quarter of 2012 was 9.0%.

So how has Wall Street taken these lemons and made lemonade? By creating low enough expectations that even lemonade is tasting sweet. For example, because of low expectations, some two thirds of the companies in the S&P 500 that have already reported so far this earnings season have beaten expectations.

http://articles.marketwatch.com/2013-04-24/commentary/38775071_1_profit-margins-earnings-season-earnings-data

I don’t really care what pundit opinions are frankly. I am going to let history, seasonality, and common sense guide me. I am always long stocks that I like, but when there is an opportunity to buy puts on the indexes at implied vols that indicate there is little chance the market will head lower into the worst period for stocks, I’m a buyer. I want the market to prove history wrong.

Especially at all-time highs and among a cacophony of folks telling me not to sell.

Outlook/Action:

As tweeted, bought QQQ, IWM, and XLF June puts today, near the highs. Also bought Apr4/May put calendars in AMZN and SBUX. Follow us @VolatilityWiz.

We will be adding a real-time email subscriber service soon at a very affordable price, still to be determined, but under $60/month. If you are interested in receiving an email concerning this service, contact me at scott.murray1@gmail.com.

I’ve been talking about getting long June puts for two reasons. The first is simply because these are two of the worst months for the indexes historically. But being long vega is another, and you don’t necessarily need the markets to move lower to make these positions pay well. Let’s look at May volatility:

Thus far, this month’s vol is mirroring our volatility wave. The absolute levels are not that important. What we see here is that as May approaches, volatility tends to rise in anticipation of May. We had another event a few months back that was precisely like this month, September of last year.

Here is volatility in August at precisely the same levels as it rose heading into September:

Look familiar? The VIX fell just after August opex, then rose steadily into September, from 13 and change to 18 as traders anticipated the historically horrible September. Here is how the market acted during this stretch:

The market not only maintained its level, but it actually rose with a rising VIX. This is why you must be aware that the market can fall with a falling VIX as well as rise with a rising VIX. These possibilities certainly affect your option positions.

Outlook/Action:

Added OIH puts on the oil spike, IYT puts and QQQ puts. These areas are heading into very weak seasonality and the IV on the puts is very low. Closely eyeing DIA, SPY, and IWM puts.

We sold IBM bear call spreads last week that paid almost 8-1 at 195-205. We are probably adding AMZN and SBUX put calendars tomorrow. We will tweet those @VolatilityWiz.

We will be adding a real-time email subscriber service soon at a very affordable price, still to be determined, but under $60/month. If you are interested in receiving an email concerning this service, contact me at scott.murray1@gmail.com.

I just returned from Spain, and you would never know the country is in recession. Madrid Center is under construction in several areas, and is bustling with activity. Same for Barcelona. What awed me was that everyone drinks during the daytime. Now I’ve seen in this in France, but in Spain it just seems more blatant. You go to a public market on a Monday at lunch and everyone is drinking.

Anyway, European stocks surged, just as the economic data points got even uglier:

http://www.ft.com/intl/cms/s/0/e3007a94-ac22-11e2-9e7f-00144feabdc0.html#axzz2RKKS2EeO

And in China, well, at least the economic data seemed to be reflected in stock prices. BTW, has anyone looked at a copper chart lately? Is this a broken correlation, or is it trying to tell people something, but no one is listening yet? This is becoming a daily tune, copper down, gold down, silver down, oil down…..This action means something. What that is yet, I am not completely sure.

U.S. stocks surged as well, thus the VIX and VXX plummeted. The futures have come in significantly the last two days:

April is #1 for Dow returns since 1950 and it is #2 for the S&P. What you are seeing should not surprise, as this is what happens in most Aprils. Yet, the “convincers” are making the rounds now. I termed these folks as the pundits that come out at seasonal/annual tops to convince you that markets are not expensive, that long-term investing means that you can invest at highs and not worry, and that the Fed has your back. It’s probably an exercise in convincing themselves that their position/bias is the correct one.

Pundits interestingly, do worse than monkeys when predicting anything. In Jackass Investing (a great book that uses pure facts to debunk everyday supposed truisms in the investing world) Micheal Dever talks about how incredibly bad they are while citing multiple studies. In one study Philip Tetlock took 82,000 pundit predictions and surmised that the more vocal, or more media attention a pundit received, the worse he was in predicting. Reminds one of Twain’s quote, that a combination of ignorance and confidence will ensure success.

Tomorrow we will cover May’s volatility history and compare historical volatility to current implied volatility. Remember that the first few days of a new opex cycle frequently see very low volatility, which is exactly where we are.

Action/Outlook: Holding June puts at low IV in several areas and looking to start adding more after today’s advance. It’s April, so the market can certainly go higher.

Also selling bear call spreads and buying put calendars. These offer terrific risk/reward ratios, and we will discuss a few as the week goes on.