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.

 

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