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Jan
12
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.
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