VIX and SPX Locked In a Cage Match. Who Will Win?

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VIX and SPX Locked In a Cage Match. Who Will Win?

The tough love at the big Euro Summit did not really produce the news that stocks were looking for this morning.  In reality, the grand poobahs there have to talk tough and Germany has to push back, since they are only country that can sell debt with 0% interest (that is a stunner!).  Euro issue bonds, like who is going to buy those?  A few billion in stimulus might come out of the summit, but really, if countries cannot abide by their commitments, it will not matter anyway, as confidence is going to evaporate.  That leaves us with the cage match between the SPX (can it hold) and the VIX (can it explode).
Look at our SPX chart below.  Not very promising but, at least, the big index is not making new lows.  The SPX cannot hold much of a rally either, but it appears that a floor for the current angst is with us.



Chart by think or swim (www.thinkorswim.com)

Now, look at the chart of the VIX.  The volatility index looks like it has a new lease on life at least once a day, but it cannot make new, recent highs.



Charts by think or swim (www.thinkorswim.com)

That leaves the US Equity market in a kind of giant earnings cycle trade.  The June volatility in the options is still gamey.  Since the intraday move, or a whiff of good or bad news will drive the markets 1-1.5%.  Then, of course, the market gives back the rally, since the specter of collapse in the Euro Zone is a pretty big if.  Simply, the market is locked in a low liquidity, mid-frequency range until the Greek elections after the June cycle.  And there is the rub.  June does not have the big pull, but the July and Jun Quarterly cycles do, since the Greek election is on the 17th of June.  That makes the set up fairly straight forward.

The Trade
Buy Straddle Swaps or Strangle Swaps (long the July, short the June) in any of the big indexes.  Let the nail bitter of Jun pass and hold the July for either the 70 handle relief rally or the end of civilization melt to SPX 1220.  I would be a buyer at 1220.



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