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As fears over Greek austerity continue to perpetuate, implied volatility in the US again is starting to percolate.  During the past 6 trading sessions, the S&P 500 index has declined nearly 4%, falling in 5 of the last 6 trading sessions.  European markets have been clobbered during 2012, with the IBEX 35 (the Spanish benchmark index) down 25% so far this year.

US implied volatility tested resistance for after creating a range between 21.5% and 14.5%.  The short term VIX index has been unable to break through the 21.5% level, despite increasing momentum on the index.  On Monday, the MACD (moving average convergence divergence index), which measure momentum created a buy signal where the spread (the 12-day moving average minus the 26-day moving average) crossed above the 9-day moving average of the spread.

The skew on implied volatility on the major index has moved out reflecting a higher interest in out of the money puts relative to out of the money calls.  This makes protective purchases very expensive and hits the true increase in insurance protection.  Additionally, the term structure of the VIX market show that deferred futures contracts are well above the 21.5% level, despite the lower level of the spot markets.

Oil prices have also generated interest for options traders.  Oil prices have declined from the peak in late March near $110, down to $95 in Wednesday trading session.  The high levels of inventory, according to the Department of Energy are creating an imbalance where supply is above the 5-year range for this time of year.

The OVX, which measure the “at the money” strikes for WTI crude oil, similar to the VIX, pushed above the 50-day moving average close to 30%.  Despite the decline in prices, implied volatility on oil prices has failed to push significantly higher.  The next level of resistance on the OVX is seen near the 200-day moving average at 39%.

 

The dichotomy in paths between the US and Europe continue this morning as weaker than expected purchasing managers indexes continued the stream of negative news for the European economies.  The US on the other hand, reported a surprise better than expected ISM on Tuesday, putting a dent into the VIX, and giving a boost to crude oil prices.

Euro zone manufacturing PMI reading at 45.9 was close to consensus, but is the ninth month in a row below 50 (which is the contraction/expansion level).  German and French readings showed little movement, but Italy’s was much weaker-than-expected at 43.8 vs. 47.9 in March.  Italian unemployment rate surged unexpectedly to 9.8% in March, adding to the negative mix.

Germany posted an unexpected 19k gain in unemployment, pushing the unemployment rate up to 6.8% from 6.7%.  Weak data have taken a toll on the euro, as EUR/USD trading at the lowest level since April 23.  Break of 1.31 level could ignite a test of the April low near 1.30, which is still within the broader 1.30-1.35 range seen this year.  Both the MACD (moving average convergence divergence index) and the RSI (relative strength index) are reflecting little momentum in the currency pair.

Implied volatility on the FXE (iShares Currency Trust) is at its lowest level in the past 52-weeks.  The extraordinary low level reflects historical volatility that is even lower near 6% (which is the 30-day period on an annualized basis).  The low level of implied volatility suggests an opportunity to protect against a re-ignition of fear, which is likely to occur given the low level of economic growth on the continent.

Implied volatility on the major US indexes remain near the lower end of the current 22-14% trading range.  This comes despite worse than expected jobs data released by ADP.  The VIX has been hugging the 50-day moving average which is seen near 17%.  Weaker than expected economic data, has been offset by better than expected earnings, which has perpetuated sideways trading and kept the VIX at relatively low levels.

After declining for 4 straight trading sessions the Nasdaq market received a boost after Apple released better than expected earnings after the closing bell on Tuesday.  Apple stock price, had declined nearly 10% over the past 11 trading sessions, but gapped higher on the Open after reporting blow out earnings.

Volatility began to increase as price action began to move lower approximately 2 weeks ago. The VIX volatility index pushed above the 50-day moving average touching resistance near 21.5%.  Wednesday price action immediately removed anxiety from the market, wiping out 5%, pushing the VIX below the 50-day moving average down to 17.25%.

Apple’s volatility tumbled in the wake of its earnings release.  The company reported net income in the fiscal second quarter of $11.6 billion, or $12.30 per share. That was nearly double the net income of $6 billion, or $6.40 per share, a year ago. Analysts had been expecting earnings of $10.07 per share.

Implied volatility for options 25 days to expiration declined from 44% as of the close on Tuesday to 32% after an hour of trading on Wednesday.  The 25% drop in implied volatility was one of the largest seen on a large cap stock in 2012.  The decline in Apple’s implied volatility spilled over into the Nasdaq 100 which saw its implied volatility drop 2.1 points or nearly 10%.

The VXN seems to be holding the 50-day moving average despite an increase in negative momentum on the index.  The MACD (moving average convergence divergence index), created a sell signal where the spread (the 12-day moving average minus the 26-day moving average) crossed below the 9-day moving average of the spread.  The index itself crossed from positive to negative which is a sign that momentum is increasing to the downside.  The RSI (relative strength index) which measures over bought and oversold levels, moved below 50 which is the middle of the neutral range for the index.

On the heels of last week’s first weekly selloff of the year, the US markets moved lower, only to rebound during the current week.  Earnings have been the driver of the rally in stock prices with financials and technology stocks along with consumer discretionary stocks posting better than expected earnings.  In the S&P 500 index, nearly 80% of the companies that have released earnings have posted better than expected profits.

As the S&P 500 index gained footing the VIX volatility index consolidated.  The VIX had been under significant pressure during most of the first quarter, but has seen a reprieve in the second quarter and has created a new trading range between the 50-day moving average at 17.40 and the recent highs at 21.50.

Technically, the VIX has shown solid upward momentum, and is poised to break to the upside on any news out of Europe that derails the current consolidation of the US equity markets.  The MACD (moving average convergence divergence index) created a buy signal in late March where the spread 9the 12-day moving average minus the 26-day moving average) crossed above the 9-day moving average of the spread.  The index on the MACD is positive and close to the highest levels seen during the past 6 months.

Additionally, the CBOT Skew index has retraced some of its recent strength, and has moved into a lower range near 128 despite the increase in the VIX.

The recent selloff in Apple stock has generated significant implied volatility on AAPL. During the past week and a half at the money implied volatility has shot up nearly 15 points from 30 to 45 for a 50% increase in volatility.  Historical volatility has also increased but still remains near the 30% level.  In days before earnings implied volatility will likely remain high as investors continue to wonder whether Apple will be able to repeat last quarter stellar earnings report.

The high level of volatility in Apple represent an opportunity to sell covered call for Apple investors.  For those long moving into earnings, selling out of the money calls can create a buffer if earnings miss expectaitons.

After a stellar first quarter, upside momentum in stock prices have taken a turn for the worse, propelling implied volatility higher as investor look for safe haven investments.  Coincidentally, peripheral yields have also spiked, which is given European investors pause and reducing inflows into European equities.

The recent rise in peripheral bond yields has capped the performance of European bank stocks, which has spilled over into the broader European indexes.  The Dow Jones European 600 bank index had rallied 40% from late-Nov ’11 to the late-Feb-mid-March high.  It has since sold off by almost 15% and appears to have been a major weight on other regional equities indices.

US indexes have taken their cues from the European markets, and have been on the defensive for 5 straight trading sessions.  A lower close on Tuesday’s session will be the 5th straight lower closes, which has helped the VIX come back from the abyss.

The VIX volatility index has been able to gain traction as equities has moved lower.  The VIX broke through the 50-day moving average on Monday on the heels of worse than expected employment data released in the US on Friday.  The Department of Labor released non-farm payrolls that increased by 120,000 shy of the 203,000 jobs expected by economists.  Many believe that the number was an anomaly given the climb in private payrolls reported by ADP last Wednesday.

The VIX is poised to test the recent highs seen near 22.5, and then the 200-day moving average near 26%.  In late March the MACD (moving average convergence divergence index) created a buy signal on the VIX where the spread (the 12-day moving average minus the 26-day moving average) crossed above the 9-day moving average of the spread.  This forecasts increasing positive momentum for “at the money” implied volatility.

The S&P 500 index is attempting to hold support near the 50-day moving average, a break below that level would likely be the impetus for a further rally in the VIX.

Riskier assets were on the defensive during the first week of the new quarter, increasing implied volatility in the broader indexes.  The rise of the dollar and treasury yields have also created minor chaos in the commodity sector, driving the price of gold below support levels near $1650 per ounce.  Oil prices were also under pressure placing energy companies under pressure, capping the upside in the major averages.

After rising more than 19% and 12% for the Nasdaq and the S&P 500 respectively.  This first week of the second quarter will be remembered for the US employment data for the month of March.  Today’s ADP employment data did little to help the broader markets gain traction, despite a better than expected number.

According to ADP and Macro Economic Advisors, private employment increased by 209,000 jobs during the month of March, greater than the 200,000 expected by economists.  ADP has been a good precursor to the BLS report which is scheduled to released on Friday.  The February data was revised to show an advance of 230,000 instead of the 216,000 increase reported earlier.  The private sector is gaining traction and without the lag of government jobs would likely create a non-farm payroll number that is greater than 300,000.

On Friday, the government will release its non-farm payroll reported along with their household survey.  Expectation are for an increase of 220,000 jobs and 8.3% employment.

Implied volatility spiked 9% on the heels of the declined equity benchmarks, increasing the VIX toward resistance near the 50-day moving average near 17%.  A break of this level, given further uncertainty and increasing European peripheral debt yields could push the VIX toward the 100-day moving average near 21%.

Gold volatility also spiked as the yellow metal moved lower on the heels of the FOMC minutes which was perceived to have eliminated the chance of further quantitative easing.  Gold volatility moved up 4 points to 27%.

The 3-month rally in the US equity markets has put a strain on volatility bulls, sapping interest in the VIX, and reducing volume from implied volatility trades.  Even the skew, which has been showing increased out of the money hedging is now beginning to slide.  There is hope for oil volatility traders, as the recent price slide has increase the demand for out of the money puts by oil producers.

The VIX volatility index, which is probably the best guide as to current at the money implied volatility, was pushed higher during the beginning of the week, but will need to close above the 50-day moving average near 17.60, for implied volatility bulls to get excited.  Further resistance on the VIX is seen near 22.5%, which has been the highs during 2012.  Support on the VIX is seen near 14%, which held for the majority of March.

CBOE S&P 500 Skew Index, which reflects the levels of out-of-the money S&P 500 Index puts slumped during the last few trading session. The index has dipped back into a 128 to 130 range which is still in the upper half of its current range.

Crude oil volatility began to increase as WTI prices moved lower during the week, testing support near $103 per barrel.  Wednesday greater than expected increase in crude oil stocks (7 million compared to the 2 million expected by analysts), has created some short term liquidation.  In an effort to hedge their exposure, oil producers have been selling calls and purchasing puts, pushing the OVX (crude oil volatility index) to 30%, from the lows earlier in the week near 26%.  A break of the 50-day moving average of the OVX near 31.6%, would likely lead to a test of short term resistance near 35%.

Next week, market participants are likely to focus on the jobs data which is scheduled to be released on Wednesday, Thursday and Friday.  The ADP report, on Wednesday and the Government Jobs report on Friday will likely set the tone of trading throughout April.  The risk is to the downside, which could drive the VIX above current resistance levels.

The grinding rally in the US equity markets seems to have removed the fear within the marketplace.  Instead of climbing a wall of worry, investors seem comfortable parking money in riskier assets and watching them climb.  The VIX volatility index, has declined to a range between 14 and 16, and until there is an impetus to push it out of this range, it will likely continue its consolidation.

Another gauge that follows investor fear and the likelihood of hedging is the CBOE S&P 500 Skew Index which is currently printing close to  138.00.  The elevated level of this index indicates activity of out-of-the money S&P 500 Index puts used for downside protection. While the VIX is at relatively low levels, out of the money options are receiving a lot of attention.

The oil markets have experienced a decline in volatility, as the price of WTI remains in a broad range between $110 on the upside, and $102 on the downside.  The skew in WTI creates a term structure where 10% out of the money implied volatility is 6% higher than the at the money implied volatility.  WTI oil prices received a boost as investors began to price in the passage of the lower half of the keystone pipeline.  A pipeline that lead out of landlocked Cushing Oklahoma, will relieve some of the backup, which creates an oversupply.

The rising flow of copper prices which reflect growth, has failed to lift some of the copper producers such as Freeport McMoran.  Implied volatility is relatively low close to 35% which is equal to the current 52-week lows.  A rally in the stock is likely to further erode volatility.  A call spread, is a structure that would allow an investor to take a leverage bet on the upside of FCX, without exposing themselves to further declines in implied volatility.  A break above $3.95 on Comex copper could be a signal to jump into this structure.

Implied volatility has moved decisively lower over the past few trading sessions, as equity bulls have full control over the US markets.  The combination of better than expected economic data, along with the Federal Reserve’s announcement that 15 major banks out of 19 tested passed the Fed’s stress test, buoyed the major indexes driving volatility lower.

On Tuesday, investors learned the majority of the major US banks pasted the Federal Reserve’s stress test.   4 of the 19 large banks failed the test, which was a rejection of their dividend and buyback programs. The banks that failed include Citigroup, Ally Financial Inc., MetLife Inc. and SunTrust Banks Inc., would have to resubmit their capital plans to the Fed.

The VIX volatility index broke through support levels earlier in the week on the heels of Friday’s better than expected employment report.  According to the Department of Labor, non-farm payrolls increased by 227,000 jobs, compared to the 213,000 expected by economists.  The revisions were also of note, adding nearly 60,000 to December and January combined.  The employment rate remained stable at 8.3%, despite a 2% increase in the labor pool (those who were looking for jobs).

The VIX sliced through support near 16%, which had held when tested in January, and twice in February.  There seems to be a divergence with the VIX, to the extent that the spot VIX is reflecting levels not seen since early 2011, while deferred VIX futures contracts are printing levels near 20%.  This reflects trepidation toward the market down the road.

Additionally, momentum on the VIX continues to point to lower values.  The MACD (moving average convergence divergence index) which measure momentum, created a sell signal where the spread 9the 26-day moving average minus the 12-day moving average) crossed below the 9-day moving average of the spread.  The RSI of the VIX remains in neutral territory near 36, which is above the oversold level of 30.

Gold implied volatility has pushed higher, as the Fed has made it clear that the likelihood of another QE is potentially far off in the future.  Gold prices tumbled driving implied volatility on the yellow metal to 20%, the highest it has been in the last 3 months.  Additionally, historical volatility for gold has also increased, reaching 3-months highs as well.

Implied volatility on the S&P 500 Index  was unable to hold gains made earlier in the week as prices on the broader US equities rebounded from a 2-day selloff.  Monday’s selloff was met with a Tuesday rally, which cap  the VIX’s upside.  Commodity volatility moved higher in the week lead by the decline in precious metals prices, gold volatility has seen increased demand as the yellow metal price has declined.  In the tech sector investors saw pumped up volatility in Apple Stock.

As investors looked forward to this current week, they eye the employment reports that were scheduled to be released on Wednesday, Thursday and Friday.  Wednesday’s ADP employment report showed an increase of 216,000 jobs which was in-line with expectations.  The risk given Tuesday’s selloff in stocks was for a worse than expected numbers.  Solid employment numbers throughout the week might allow the markets to end the recent profit taking.  Worse than expected numbers could be the catalyst that allows the VIX to break to the upside.

The VIX test the 21.5% level for the second time in the past two weeks.  The high for the year in the VIX has been near 22.5%, and the index has settled into a 6 point range with the low near 16%.  The range could perpetuate for a while, but it is unlikely to move significantly through the 16% level, with Greece remaining in the headlines.

Technically, the VIX looks like it is forming a bottom, despite the 50-day moving average crossing below the 200-day moving average in mid-January.  This crossover (known as the “death cross”)  is generally the sign of a medium term trend.

The decline in the VIX has not been echoed by either Gold volatility or Apple Volatility.  Gold price have slumped over the past two weeks, as the likelihood of an additional QE3 in the US seem to fade. Gold volatility climbed to near 25% which equals the highs seen since November 2011.

In the tech sector the news that Apple would announce a New iPad puts Apple volatility up to 6-month highs.  Apple volatility tested resistance near 32%.  Support on Apple Volatility is seen near 25%.  The spread in Implied volatility and historical Apple volatility is at its largest spread seen in the past 6-months.

Moving forward, look for Implied volatility on the major indexes to remain in the current range, assuming the current employment figures are in-line or better than expected.

There is a bid underneath the US equity markets which is keeping the US market buoyed and allowing them to grind higher on a daily basis.  Historical volatility for the S&P 500 is at a 52-week low as it pushed through levels seen in April of 2011 when the stocks last visited these current levels.  Gold and Silver implied volatility received a pop on Wednesday after Chairman Ben Bernanke stated in his bi-annual statement to congress that inflation was likely temporary.

Historical volatility which is basically the standard deviation of the returns of an asset annualized, has reached very low levels.  The current range between 7.5% and 8.5% has not been seen for nearly 52-weeks.  The average historical volatility seen during the past 6 months is close to 20%, which included the periods when the markets were very volatile as the fear over the EU debt crises took hold of investor sentiment.

Implied volatility is also extremely low, but still continues to have a significant premium over historical volatility.  The spot VIX is printing levels close to 17.5%, with a range between 16.5% and 20%.  Resistance near the 50-day moving average of the VIX has held during the recent increase in stock prices.  The cross of the 50-day moving average below the 200-day moving average of the VIX in mid January signals the middle of a medium term trend.

Despite the low level of implied volatility, the Skew Index, reported by the CBOE remains relatively elevated.  The skew index, which measure the demand for out of the money strikes for both puts and calls is printing near 128 which is a 6 month high.  Additionally, the VIX futures market term structure is in a relatively deep contango.  This means that current prices on the spot futures contract are lower than deferred contracts.  Although investors believe that current volatility will remain low, they are certainly worried about the future.

Gold and Silver implied volatility jumped nearly 2 volatility points as both markets were under pressure after Ben Bernanke stated that he believed the current inflationary pressure in the commodity sector were temporary.  Gold and Silver experienced sum of the largest losses seen during 2012.  Put volatility soared, but the liquidity provided by the ECB, BoE, FOMC and the PBOC are likely going to continue to support the hard asset markets.

Major US equity indexes consolidated during the week, as headlines in Greece and weak European economic data, continued to weigh on equity bourses.  US markets did their best to shrug off weak European stock markets, as the dollar continued to consolidate despite another agreement to fund Greek debt.  Oil markets continued to be the leader in capital markets flow, as Brent prices lead WTI above technical resistance.

The VIX volatility index continued to consolidate.  US markets moved sideways, and investors used this opportunity to purchase inexpensive index options.  The spot VIX pushed through support levels, closing at the lowest level in the past 52 weeks.  Although spot volatility is relatively low, the VIX futures curve is telling a different story.  6-month deferred futures are still above 20%.  Late last week, the VIX tested resistance levels near the 50-day moving average at 20.80, before closing the week near 18%.  With a MACD (moving average convergence divergence index) hovering around the zero index line, momentum has been sapped from the implied volatility market.

European markets remained under pressure for the majority of the weak as economic data continued to point to a contracting economy.  The EU purchasing managers index for February surprised investors by coming in weaker than expected.  The composite PMI output slipped below 50 to 49.7 after moving higher in January at 50.4.  Some have blamed the unseasonably cold weather for the lack of manufacturing activity during the month of January, and other believe it is a snap back from January.

In the US, Existing-home sales climbed 4.3% in January month over month to a rate of 4.57 million, according to the National Association of Realtors.   Economists surveyed had expected home sales to rise by 0.9% from the previously reported December figures to an annual rate of 4.65 million.  The housing market has started to gain traction as price levels have dipped to the point where volume is beginning to increase.

Crude oil prices have broken out to the upside, pushing above resistance near $105.  The increase in prices has coincided with a climb in crude oil volatility, which climbed slightly to 33.7%.  Implied volatility for the petroleum complex has been under pressure for the majority of 2012.  Crude oil volatility met selling pressure early in January near 40%, against the 200-day moving average, and has failed to test this level since.  Support is seen near the recent lows near 32%.  The MACD has created a buy signal on crude oil implied volatility which potentially could create upward momentum for the OVX.

Implied volatility continued to remain supported, as defensive trading surrounding Greek debt issues kept US markets on the defensive for a second straight trading session.  During the past week, better than expected economic data failed to lift markets, which is a sign that the positive sentiment might have lost its momentum after the broader markets have rallied substantially during the first 6 weeks of the new year.

The VIX experienced its first solid rally so far in 2012.  The smooth rally in the equity markets during the first 6 weeks of 2012, has taken a lot of the fear out of the markets, adding downward pressure to the VIX.  The volatility index, which measures the “at the money” strike values of the S&P 500 Index climbed nearly 8%, (or 1.6 points), to 21.14 on Wednesday, the highest closing level in almost 1 month.  The VIX tested resistance near the 50-day moving average at 21.40.  A break of this level would likely target resistance near the 200-day moving average which is currently 26.

The CBOE volatility skew index is a measure of the changes in demand for specific strike prices for the S&P 500 index.  If traders are looking to hedge downside activity, they are usually willing to pay a higher price for out of the money puts, then they are for at the money options or out of the money calls.  On Tuesday, the Skew tested the 52 week high near 131.  This is a reflecting of traders looking to hedge using out of the money puts, which climb in relative volatility when compared to at the money options.

Implied volatility in the currency markets is beginning to rise as the EU and Greece have not been able to close the deal on austerity for a second round of financing.  Implied volatility on the FXE moved higher on during the week, pushing back above the 13% level for the first time in the past 3 weeks.  The calmness in the currency markets was broken early in the week when the Bank of Japan decided to increase its asset purchase program.  The new quantitative easing program added approximately 128 billion dollars of assets, which pushed the USD/JPY up nearly a full big figure.  Implied volatility also jumped nearly one full point.

Toward the end of the week, solid US economic data, kept the US equity markets buoyed, but failed to reduce implied volatility.  Expectations in the options markets is that the US bourses will experience some kind of pull back and that is likely the reason for elevated volatility.  A key impetus will be worse than expected economic data, which will not likely be available until the beginning of March.

Implied volatility continued to suffer as issues related to Greece have been trumped by better than expected economic data and strong US earnings.  During 2011, traders experienced close to 30 days of more than 300 points swings in the Dow Industrials compared to zero so far in 2012.  On Tuesday, the Dow closed at its highest level since 2008.

The VIX volatility index, which measures the “at the money” implied volatility of the S&P 500 Index, is settling into a new lower range between 20%, and 17%.  This past Friday’s employment report gave investor’s confidence that the markets will continue to grind higher, which took additional premium out of the VIX.

Last Friday’s employment report could have been a turning point in market sentiment, which could hold for the balance of February.  According to the Department of Labor, non-farm payrolls increased by 243,000 compared to the 125,000 expected by economists.  Additionally, the employment rate, which is a household measure of employment, dipped to 8.3%, compared to the 8.6% as expected.  Employment has now shown double digit growth for the last three months, averaging over 200,000 jobs which is in line with 3% growth.  Many doubters of the equity rally in January where waiting for a negative jobs number to lean into short positions, which has now been erased for the short term.

One of the more interesting increases in stock implied volatility is Sears Holdings (NYSE:SHLD).  Sears is expected to release earnings on February 20, 2012.  Implied volatility on the nearby contract has surged to 111%, which is 5 volatility percentage points above last week’s level.  The range on implied volatility for Sears is 30% to 115%.  Historical volatility using a range method is 78% to 118%.  Current implied volatility is extremely high and trading above the prints for historical volatility which signals an opportunity to sell Sears implied vol.

Despite issues with Iran and a potential embargo that could lead to a closing of the strait of Hormuz, oil prices remain below $100 per barrel.  Similar to the change in the spread of Brent and WTI during the Libyan crisis, Brent prices have continue to remain high.  The spread is now $20 dollars per barrel, which Brent trading near $117.  The oversupply of WTI crude oil has lead to relative depressed prices when compared to Brent and has pushed the OVX crude oil implied volatility index to 32%, which is the lowest seen in the last 52 weeks.

During the balance of this week, market participants will focus on the ECB and the BOE, along with US earnings which continue to impress.  US economic data that will be of interest is retail sales, which has not shown the bounce expected after solid holiday sales.  Many stocks have broken out to the upside, and have pulled the major averages higher.  The markets are likely going to correct, twice between now and late April, which gives investors time to look for cheap volatility.

US equity markets continue to be driven by positive earnings and economic data.  Last week’s weaker than expected 4th quarter GDP data along with Tuesday’s disappointing consumer confidence was offset by Wednesday in line ADP employment report.  The news also continues to focus on the future IPO of Facebook, which seems to be helping the internet and technology sector.  The S&P 500 Index continues to move higher driven by the S&P 500 technology index which has hit a multi-year high.

Wednesday’s better than expected ISM manufacturing index is generally highly correlated with the S&P 500 index.  The ISM’s index increased to 54.1 in January from a revised 53.1.  Economists surveyed had expected the January PMI to increase to 54.0.  The ISM’s new orders index rose to 57.6 which is the highest reading since April 2011.  The increasing level of this barometer should be positive for the S&P, but negative for implied volatility.

Meanwhile, implied volatility on the major indexes continues to trade in a tight range as fear over Europe and a potential debt default has somewhat abated.  The EU continues to meet with Greece to determine the fate of private investors in Greek debt.  The soft default is the most likely scenario, but any pullback by the parties involved will likely take the VIX to higher levels.

After edging higher early in the week, the VIX volatility index, which measures the implied volatility of the “at the money” strikes of the S&P 500 Index, has declined back through 20%, and is poised to test support levels near 17.5%.  With the “death cross” occurring last week, were the 50-day moving average of the VIX crosses below the 200-day moving average of the VIX, downward momentum in the volatility gauge is likely to continue.

Polypore International, (NYSE:PPO), was the largest of the implied volatility movers during this current week.  The stock price plunged 26% as Axiom Securities initiated coverage with a sell rating and a $26 price target.  The implied index mean of PPO increased to 90%, from 69%, which is a 31% change.  Implied volatility spiked to 112% before coming off, and was as low at 47% last week.

Kinder Morgan (NYSE:KMI) also experienced a large change in implied volatility this week, moving to 27% from 23% one day ago.  Historical volatility on the stock is printing near 23.81, but has been as low as 17.7 using the historical range method.

Commodity implied volatility continues to be lead by natural gas Henry Hub, despite the incredible decline in natural gas prices that the market has witnessed over the past few months.  Natural gas prices have broken through the 2.5 per mmbtu level, but still boasts and implied volatility level of 64%.    Silver futures implied volatility is also relatively high, reflecting a level near 46%.  Frozen concentrated orange juice is also high near 46.3%.

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.

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.

 

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.

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.

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.

Trading slowed heading into the Columbus Day weekend on Friday. After three days of gains, stock market averages ticked higher Friday morning after the Labor Department said the US economy added 137,000 new jobs in September, which 55,000 more than expected. The early advance was short-lived and the Dow Jones Industrial Average moved lower after Fitch downgraded both Italy and Spain.

Fitch cut Italy by one notch to A+ from AA- with a negative outlook.  However, this rating remains relatively high.  Italy showed remarkable stability in its credit standing during the early part of the crisis and stayed at an implied A+/A1/A+ for quite some time.  However, it has succumbed in recent quarters to fall to A-/A3/A- currently.  Earlier this month, Moody’s cut Italy three notches to A2 and last month, S&P cut Italy by one notch to A from A+.  All three agencies have a negative outlook, so further downgrades appear likely.

On the economic front, the employment report surprised to the upside, giving investors a glimmer of hope that monetary policy is helping the economy to get back on track.  Nonfarm payrolls rose by 103,000 in September as the private sector added 137,000 jobs, according to the Labor Department. Expectations were for an increase of 60,000 jobs.  Payrolls data for the previous two months were revised up by a total 99,000 to show 57,000 jobs were added in August and 127,000 jobs in July.

The VIX volatility index remained within the lower half of the current 48-31 range, after testing the 42% level multiple times this past week.  Implied volatility is trading above the 50-day moving average near 36.5%.  A break of this level will likely test the 31% level, and will coincides with an equity breakout.  The VXN Nasdaq volatility index also tested support near 37%, and has further support near the 31% level.

 

 

In bullish flow, Sprint (S) shares ran to morning highs of $3.39 after CNBC highlighted items from a conference call and noted that iPhone sales will result in huge cash flow for the company. However, the stock came under pressure and was halted after an AP story indicated that the company will stop selling Clearwire (CLWR) compatible products and Reuters reported that Sprint might need to access the market to raise capital. Shares hit a low of $2.65 when trading resumed.  Trading in options on the stock is brisk, with 68,000 calls and 18,000 puts traded. Meanwhile, implied volatility in the options soared 15.5 percent higher and is elevated at 112.5.