Wednesday, February 29, 2012
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.