Volatility Trading Digest: Market Review from a Volatility Perspective

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IVolatility Market Review

S&P 500 Index (SPX)
After a substantial rally that took the index past the overhead resistance at 1040.78 look for a minor trend change indicator for clues that this run could be about over. A downward sloping trendline extended from the April 26 high at 1219.80 to the June 21 high at 1131.23 makes a good upper boundary that should contain the current upmove in the 1088-1090 range. If so, then the large Head & Shoulders Top described in last weeks digest continues to be the operative technical pattern with a downside-measuring objective at 862.

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One reason for concluding there is more downside to come has to do with the light volume of this most recent rally off the July 1 low at 1011.40. The Tuesday turn around volume of the SPDR (SPY) was 257 million shares and then it declined every day ending at only 143 million on Friday. The fact it was a holiday shortened summer week could account for the low volume and could be the reason rally was not turned back at the 1040.78 resistance level.

E-mini S&P 500 Futures (ESMO)
Unlike the cash, the E-mini made a key reversal on Tuesday closing ten points higher as open interest expanded 39K contracts. For the rest of the week open interest declined on the continuing price increase suggesting some shorts were closing positions, probably at a loss. Volume was moderate every day except Friday.

S&P 500 Index Implied Volatility (IVXM)
Since our last review, the Implied Volatility Index Mean decreased from 24.60 to 22.08, while the VIX declined from 28.53 to 24.98.

The table below shows the VIX Cash compared to the next two futures contracts as well as our calculation of the day-weighted average between the first and second months.


For this short-term indicator the premium to the cash is a SPX sell signal as it indicates professional hedging and the expectation that the cash will rise back toward the futures price. Last week the reading was 8.74%, compared to 4.87% in our market review two weeks ago. In summary, the VIX Futures indicator is becoming more bearish.

VIX Options
With a current Historical Volatility of 133.85, the table below shows the adjusted Implied Volatility (IV) of the at-the-money VIX calls and puts using the futures prices based upon the closing option mid prices on Friday along with their respective month's futures prices.


VXX Options

iPath S&P 500 VIX Short-Term Futures ETN (VXX)
This ETN is based not upon futures but on the cash VIX. The current 20-day Historical Volatility is 60.66 up from 50.06 last week, while the 30-day Historical Volatility is 69.52 up from 67.13 last week.


The Implied Volatility Index Mean at 75.49 is up from 65.46 last week and there is a noticeable skew between the calls at 77.42 up from 66.37 last week and the puts at 73.55 up from 64.54 last week. Using the 20-day Historical Volatility there is a positive volatility spread that appears to be increasing as the calls are bid higher by hedgers expecting the S&P 500 Index to decline accompanied by an increasing VIX.  



US Dollar Index (DX)
Although the Swiss National Bank said it is no longer supporting the euro against the Swiss franc, the euro continues moving higher after having made a Head & Shoulders Bottom. Using the CurrencyShares Euro Trust (FXE) 126.00, our estimate of the minimum upside measuring objective for the euro is 129.64. We wonder if the euro support is now coming from China. Based on recent correlations the stronger euro and the correspondingly lower dollar would most likely provide support for equities and commodities. 

iShares Barclays 20+ Year Treasury Bond (TLT)
As a risk-on indicator, long bond yields are back to 4.04%, having declined as low as 3.86% on July 1. The 90-day TED spread, our substitute for the often-quoted Libor OIS spread, is now at 38.18 basis points down from 40.92 basis points in our last review. As an interbank liquidity measure, TEDs decline should continue adding support for equities and other risk-on trades.

NYSE McClellan Summation Index
Since out last review, the NYSE Composite Index breadth indicator reversed to the downside with a 171.62-point loss and the shorter-term oscillator is approaching overbought territory, not a positive development for the bullish case

iShares Dow Jones Transportation Average Index (IYT)
After declining as low as 70, IYT recovered with the rally, however a close back above 82.5 is now required for this important indicator to signal that the market uptrend has resumed.

Baltic Capesize Index 
Since our last review, the Baltic dry-bulk shipping rate index for the larger ships carrying iron ore and coal declined another 615 points reflecting slowing demand from China and new ship deliveries along with storage contract terminations. On a more positive note, the World Shipping Council says that May container shipping volumes on the key Asia-Europe route rose 20.9%.

Capital Link Tanker Index
Since our last review the tankers index declined moderately, but in the VLCC sector, benchmark rates have hit their lowest level of the year. For example, the 270 MEG-Korea rate declined from $55,686 per day to $19,308 per day. According to PF Bassoe, the Norwegian shipbrokers, "Tonnage that has been doing floating storage has begun to redeliver, adding to the pressure on spot rates." This redelivery of tonnage is understandable since the 3-month crude oil contango has declined from $7.18 per barrel in mid May to just $1.56 last week.

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