VolatilityAnalytics.com

It appears that we’re approaching a sort of “show me” moment in the market right now, where the VIX appears to want higher percentages and the S&P is nearing a support line (50 day sma) that it has held religiously since last October. In today’s algo-bot market, where the vast majority of trades are made by artificial intelligence, trends seem to last longer and technicals are heavily respected, so this may be a critical juncture for 1-3 month market direction.

(I apologize to readers for my recent absence; I’ve been dealing with a confluence of events, including the CFA exam, and food poisoning, but I should have time to post 3-5 times per week going forward.)

If the 50 day is decisively broken, a lot of folks will be stopped out, that is just the fact of the matter. They do not debate it. Whether there are others to step in on POMO faith, during interest rate volatility, and questionable macro and seasonal factors will be very interesting.

Courtesy: Stockcharts.com

In the meantime, the VIX has in my opinion been very well behaved as the S&P has fallen 80 points, or 4.7% in 10 trading days. Last year as this seasonal fall was occurring, on it’s normal May schedule as opposed to late May early June, the VIX saw levels well above 20. What followed was a summer which saw the VIX explore depths not seen in several years. So, we are at a bit of a crossroads here, IMO.

Nothing has changed frankly, except the month. Macro data is still stinky to meh, but not awful. So it is BLATANTLY obvious that the Bernanke is not even close to turning down the money machine. This can’t be more clear. Furthermore, where are rates going to go with core inflation going LOWER? Forget about core inflation, oil and gasoline are lower than last year. He may print just to reach the inflation mandate:

Source: Dallas Fed

So, futures are tracking the VIX very closely

Futures

Symbol	Contract	Month	Time	Last	Change	Open	High	Low
VX M3-CF	S&P 500 VOLATILITY	June2013	16:22:36	17.05	0.95	16.40	17.05	16.25
VX N3-CF	S&P 500 VOLATILITY	July2013	16:15:00	17.70	0.60	17.25	17.70	17.15
VX Q3-CF	S&P 500 VOLATILITY	August2013	16:15:00	18.20	0.40	17.90	18.25	17.84

While the actual VIX term structure is front loaded with vol:

VIX Volatility Index values generated at:  06/05/2013 14:58:14

Trade Date	Expiration Date	VIX	Contract Month
6/5/2013 2:58:14 PM	22-Jun-13	17.84	1
6/5/2013 2:58:14 PM	20-Jul-13	17.19	2
6/5/2013 2:58:14 PM	17-Aug-13	17.51	3
6/5/2013 2:58:14 PM	21-Sep-13	18.06	4
6/5/2013 2:58:14 PM	21-Dec-13	19.13	5
6/5/2013 2:58:14 PM	18-Jan-14	19.37	6
6/5/2013 2:58:14 PM	22-Mar-14	20.09	7
6/5/2013 2:58:14 PM	21-Jun-14	21.03	8
6/5/2013 2:58:14 PM	20-Dec-14	22.15	9
6/5/2013 2:58:14 PM	19-Dec-15	24.63	10

Notice that the front month VIX future is lower than the back month, whereas the actual June S&P options have higher implied volatility than July. So, calendar spreads selling near-term vol and owning time seem to be a potential strategy here, provided the market holds levels and doesn’t break down.

On the VXX front, the note has now just crossed 50/50 ownership of the June and July contract, so big moves higher will be hard to come by, but a significant bounce can deflate it mightily. I’ve been dabbling with June puts out 2-4 weeks at $17 and $18. As you can see, the futures are not even near threatening backwardation, and are still solidly earning negative roll.

Straight long for a bounce play, the XLF 19.50 weekly calls for next week look attractive if you feel like the 50 sma will show support.

Outlook: Vol tends to hang tough in June, as it is the second worst month of the year for the Dow and 3rd worst for the S&P. Yet, just getting by the stupid job number on Friday tends to deflate some vol by itself. I call it stupid because it has a margin of error of +/- 100,000 jobs, and pundits spaz over 10k here or there. Idiot television. Of course, they ignore the revisions, which are historically positively biased.