Jan

26

Strong Earning and Fed Sink Volatility

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Market volatility seems to have grinded to a slow halt as investor confidence in the US equity markets grinds higher.  Implied Volatility measured by the VIX volatility index edged through the 20% level late in the prior week.  Stocks were on hold for the first couple of trading sessions as investors awaited some big cap stock earnings and the announcement from the FOMC meeting on Wednesday.

Earnings results have surprised to the upside, and have allowed US equities to push through resistance levels, that will likely target much higher levels.  Better than expected earnings from Microsoft, Caterpillar,  and Apple, have created a strong demand for stocks, pushing the major averages up more than 6% for 2012.

After reporting much better than expected earnings after the bell on Tuesday, Apple surged more than 7%, and experience a huge decline in IV.  Near term implied volatility dropped from above 35% to below 20% post earnings.  The decline puts at the money implied volatility on Apple at the lowest levels in the past 52 weeks.  Historical volatility has also seen a large drop, with the range method showing a high on historical volatility of 25% and a low near 13%.

Microsoft implied volatility has also seen a large decline.  The software giant has seen large institutional buying which has pushed the stock above the $29 dollars and has tested the $30 dollar level for the first time since early 2010.  Implied volatility on the stock has moved below 20%, which is the lowest level in the past 2-years.

The VIX volatility index which tracks the at the money implied volatilities of the S&P 500 tested the 17.5% level, which is the lowest level since July of 2011.  The lows, since prior to the summer swoon when investors experienced a second panic over the European debt crisis, where 15%, which seems to be the level traders will potentially test.  With the 50-day moving average of the VIX now crossing below the 200-day moving average of the VIX, downward momentum on the implied volatility index is likely.

The Nasdaq 100 volatility index is trailing the VIX, printing a number of 19%, which is above support levels seen in July of 2011.  The OVX has also seen the 50-day moving average cross below the 200-day moving average which is a sign of continued negative momentum for implied volatility.

Investors are still continuing to use the low volatility environment to hedge long portfolio positions.  The skew index, is now at the upper end of the recent range, showing that out of the money puts are still in favor.  Investors are still willing to pay a premium to purchase out of the money puts relative to at the money options and out of the money calls.  Investors could consider using put spreads to hedge long positions.  In this circumstance, and investors could purchase an at the money put and use the skew of the out of the money put to finance closer to the money puts.

Jan

18

Implied Volatility in January

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Implied volatility finally began to drift lower, but still remains above support, as investors remain careful to hedge their bets in case the January effect fades quickly.  Historical volatility has been printing above the implied volatility index mean of the S&P 500 Index during the recent decline.  On Tuesday is pushed below printing near 15%, compared to the 20.5% for implied at the money volatility.

The US markets have been slowly grinding higher and some stocks which include Microsoft have rallied nearly 8% in 2012, reflecting interest by investment managers to be in the broader market.  Microsoft as a large cap stock with low volatility has recently been a guide for overall investment activity.

Economic data points continue to remain positive.  Last week’s worse than expected retail sales data is now just a memory.  Homebuilder confidence rose to its highest level in the past 3 years.  Wednesday’s producer price index was in line with expectations, and did not seem to have an effect on market sentiment prior to the bell.  As China continues to show that it is moderately declining, equities and riskier assets have been outperforming.

Most investor attention had been focused on earnings which have been mixed.  Financial institutions have been a relative drag despite the mixed results.  Citigroup and JP Morgan released earnings and revenue which were disappointing, while Wells Fargo and Goldman Sacks beat analysts’ estimates.

The semi-conductor sector spiked on Wednesday with increasing call purchase action.  Implied volatility spiked, as investors rushed into the sector.  Earning are expected during the next two weeks, which is helping to drive investors expectations.  Implied volatility on the SMH, which is the semi-conductors holders ETF, jumped more than 3%, to 29%, up from %26.12 in the prior week.    Historical volatility jumped to 15% and 18% using a historical range method.  The put call ratio on volume on the ETF is .50, which is considered neutral.

Support on the VIX volatility index continues to remain robust above the 20% support level.  The 50-day moving average of the VIX is coming close to crossing below the 200-day moving average of the VIX which is know in the industry as the “death cross”.  It seems to be coinciding with the “golden cross” which is also approaching in the S&P 500 index.

The RSI on the VIX is moving close to 41, which is higher than the 30 level reached the last time the VIX tested the 20% level.  The MACD on the VIX is near the zero line which reflects a consolidative pattern that is showing little momentum.

Looking forward, there are a number of important earnings releases that will likely create volatility for individual stocks.  Headlines from the European Union will also likely keep implied volatility elevated despite the markets slow grind higher.

 

Jan

12

US Remains Resilient, but for How Long?

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US markets continued to show signs of life in the second trading week of 2012.  Implied volatility continued to remain in a tight range, but refused to fall below the 20% level, which is historically elevated while markets are trending higher.  At the end last week, better than expected employment data along with this week’s solid consumer credit, have given US investors some solid themes to trade on.

Surprisingly, the European markets have had little effect on the US markets.  Investors are now looking for the headline that will spark the fuse that will ignite implied volatility and crater the US equity markets.  Some believe US investors have Euro fatigue and that is why the current negative news is not creating further headwinds for US markets.

European Issues Affect US Markets

The Euro has declined below 1.30 toward 1.26 in the first two trading weeks of the new year.  The decline of the Euro is having somewhat of a negative effect on large cap global stocks.  In their recent 4th quarter report, Oracle, which usually has not problem beating earnings estimates, reported a miss which saw share prices fall nearly 14%. Oracle blamed some of the companies loss on the decline in margins in Europe, along with the rally in the US dollar.  This could potentially hurt other global companies will also experienced the negative effect of a declining Euro.

The decline in implied volatility has made it difficult to find pure option plays.  Investors have been selling volatility even within the currency markets.  The ETF FXE (Euro Investor Trust), has declined in price along with the Euro which has been accompanied by a decline in implied volatility.  Historical volatility has lead volatility lower, which could be partially accounted for by end of the year/ beginning of the year trading.

The implied volatility average has fallen from a high in October of 18%, to the current 12% level.  10% was the 52 week low for FXE implied volatility.  This low in April of 2010 which coincided with the highs in US equity markets.  Investors should consider keeping an eye on FXE implied volatility as it grinds toward 10%.

Nasdaq

Along with the decline in the VIX, the VXN, which is the volatility index for the Nasdaq has decline to support near the 21% level.  Technology stocks have been the outperformers in 2012.  Further support on the index is seen down to the 16% level, which was the low hit in both 2011 and 2010.  It is unrealistic to believe that Euro Zone issues will not spill back over into the US, which makes volatility levels near 18% interesting on the technology index.

Jan

5

Volatility Softens as 2012 Begins

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US Markets are beginning to disconnect from many of the European bourses as economic data continues to show that the US economy is gain traction which could spill over into corporate profits.  In Early December, if the Euro dropped more than a big figure, the S&P 500 would decline as least a percent, and the VIX would shoot higher, pushing up implied volatility premiums.  The question on many traders minds is whether the US can disconnect from Europe.Volatility Softens as 2012 Begins

Implied volatility for the benchmark S&P 500 Index traded in a large range reflecting trepidation during times of stress throughout 2011.  The VIX volatility index, which tracks the “at the money” mean of puts and calls on the S&P 500 index hit a high of nearly 48% during early August and then again in mid October.  Fears over European debt and the ability of Greece, Portugal, Spain and Italy to pay their debts created the need for portfolio managers to purchase downside protection.  Support on the VIX has remained near 22%, which is below the longer term 200-day moving average near 26%

Unfortunately, many of the issues that plague European sovereignty has not gone away.  Europe needs a fiscal union to end overspending in many of its financially troubled countries.  Creating a Eurobond and a lender of last resort will likely be the only path that could stabilize Europe.  It is difficult to believe that the US will be able to forge on without help from Europe, but declining rates in China could be the impetus needed for further upside in US markets.

Economic data will likely be the main focus for US investors during the first week of the new year.  Manufacturing data released on the first trading day of 2012 showed a better than expected growth.  The ISM PMI increased to an index level of 53.9.  Analysts estimates averaged an increase to 53.0. The employment index, a highly scrutinized sub index, increased to 55.1 in December from 51.8.

Employment will also likely be a strong driver of US capital markets.  On Thursday, investors absorbed better than expected private sector employment data.  According to ADP and Macro Economic Advisors private sector employment grew at 325,000 in December, compared to the 175,000 expected by economists.  Historically this number has been the largest during the year, but the trajectory of growth in employment is very positive.  Investors will be focusing on Friday’s BLS employment report to fully gauge the current employment situation.

The Nasdaq 100 is an interesting benchmark for implied volatility given the range of expectations for earnings.  Recent disappointment from Oracle and RIMM have supplied historical volatility.   The 30-day implied average of at the money volatility is down week over week to 21.05%.  The 52-week range is from 43.18 and the low is 13.50.  A sustained rally will take implied volatility lower, but on a relative basis volatility is trading on the lower end of the 52-week range.  During the last two summers, EU debt woes took implied volatility higher, after making annual lows during the highs in stock prices in late April 2010.



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