Bond auctions and interest rate volatility are agitating equity markets. Today at 1pm, all eyes were on the 10 year auction, which was bid at a level not seen since last August. That caused this to happen to yields on the 10yr:
Yields fell ahead of the auction, then reversed course and finished higher. In two hours the yield rose 2.7%. As we know from the Euro charade of the last few years, rapidly rising rates cause agita in global markets. The VIX took that cue and moved higher as well, and stocks sold off.
Tomorrow, the most volatile of terms, the 30yr, will take center stage, and the Street will stop to watch the results. The Fed meeting can’t come fast enough for those in the fixed income world, for nothing more than a bit of clarity and maybe some rest for soaring yields. Ben will most certainly give a “steady as she goes” bond buying pitch, and we will see what the punditry will try to extrapolate from his comments. Most of which will be imaginary.
While everybody waits for that to occur, the S&P sits precariously on the 50 day moving average. Volume was not particularly heavy, today was more of a drift down than the elevator lower:
Courtesy of stockcharts.com
The VIX has only seen four days this year at higher levels, so we could see another spike higher as the 50 breaks, or a holding pattern at emma watson pokies high levels until the Fed meeting and then a volatility exhale. This is setting up for a nice trade in the VXX. We are sitting at significantly oversold levels, as this chart speaks volumes. Just look at the MACD; you have to go back years to see it at that level:
VIX futures are tracking spot tightly, as expiration is only four trading days away. At that point, the VXX will be holding all July, and that allows the VXX to move more efficiently with one futures contract, the front month. As the month wears on and it holds more of the following month, the later month acts as a bit of a stabilizer to spot VIX spikes.
| Symbol | Contract | Month | Time | Last | Change | Open | High | Low |
|---|---|---|---|---|---|---|---|---|
| VX M3-CF | S&P 500 VOLATILITY | June2013 | 16:12:51 | 18.20 | 1.30 | 16.45 | 18.47 | 16.35 |
| VX N3-CF | S&P 500 VOLATILITY | July2013 | 16:13:01 | 18.53 | 0.93 | 17.20 | 18.70 | 17.15 |
| VX Q3-CF | S&P 500 VOLATILITY | August2013 | 16:13:01 | 18.86 | 0.71 | 17.85 | 19.00 | 17.80 |
All of the IWM and SPY short calls in our diagonal spreads are virtually worthless and have been closed out, so any bounce in the market before next Friday will be very profitable. It is almost time to buy VXX puts, but I feel as if there will be a better entry point this week as the S&P dips below the 50 day and shakes out some folks.
Look for retail sales to set the early tone tomorrow.
