This week the market edged lower for the first time this year. The rally in the S&P 500 has been prolonged and quiet since January 2nd, and that has correlated with historically low volatility. The VIX has recently revisited levels not seen since 2007. And while the S&P lost a mere four points, that result clearly masks the inevitable future reality – more volatility lies ahead, significantly more than has been witnessed to this point in 2013.
As similar as those articles that postulate that “volatility is here to stay”, when volatility is elevated, so are the erroneous articles that lately have been claiming that we are entering years of subdued volatility. Did anyone really think that we can chug higher on 3 S&P point days ad infinitum without seeing significant downward action?
Jeff Saut at Raymond James highlighted how anomalous the trend to begin the year had become:
“Then there is my “day count” sequence, which has served us pretty well over the years. To reiterate, “buying stampedes” typically last 17 to 25 sessions with only one- to three-session pauses and/or pullbacks before they exhaust themselves on the upside. It just seems to be the rhythm of the “thing” in that it takes that long to get everyone bullish enough to throw in their “bear towels” and buy right in time to make a trading top. While it’s true some stampedes have lasted 25 to 30 sessions, it is very rare to have one extend for more than 30 sessions. In fact, I can count the number of them on one hand with the longest lasting 53 trading sessions (August 2006 – October 2006); and the next longest being the 38-session march into the August 1987 “top.” For the record, today is session 34 since this stampede began on December 31st.”
“Last week the SPX made it seven weeks in a row on the upside. According to my notes, this is the first time in 42 years that has happened at the beginning of the year.”
With the machines representing such a large fraction of trading volume these days, the down days seem to take on ridiculous speed when they occur. So you have trending algos saving all quiet days to the upside, until you get -35 S&P points in a few trading hours. These micro flash crashes are going to be a part of life going forward as market dynamics change. The computers don’t waste time filling out order tickets. (Imagine a day in which these systems get hacked?)
The VIX was resurrected this week, and what is comical about math sometimes is the way percentages fool people on face value. Yeah, so the VIX was up 20% in a day, is that really relevant when it was sitting at 12? No. Those that use historical volatility to determine if the VIX is pricey or not, simply miss the point. The unknown deserves respect, and a premium or discount to history.
Following us on Twitter/Stocktwits, we posted an excellent risk/reward trade, a bull put spread on the VIX when it was sitting on 12 and change on Tuesday:
In two days we covered the short leg at .50 and are sitting on the 12 puts in case any complacency comes around between now and March 20th. It is important to note that the VIX futures expire on the 20th this month, and in future posts we will explain why.
Follow us at VolatilityWiz for real-time trades and volatility commentary.
Note: This blog will begin updating daily between 4-5pm daily during market days.