Calm Has Been The Rule In The US Stock Market For 3 Yrs
$VXX
Calm has ruled the American stock market for almost 3 years, a period in which the Standard & Poor’s 500 Index has had no pullback of 10% or more. This month concern about the Fed has sent US Treasury yields to the highest since October and the USD down to marks not seen in 2 months.
Participants use VIX contracts as a tool to protect stock holdings from losses or to speculate on increases in stock market stress.
The VIX moves in the opposite direction of the equities benchmark about 80% of the time.
5 of the 10 most-owned VIX contracts are calls with strike prices as high as 23 expiring 17 June, the last day of the Fed’s June meeting.
In March, traders were speculating next week’s FOMC meeting would be the time for the central bank’s 1st interest rate increase since Y 2006.
Odds for a move that soon fell as GDP contracted in Q-1. As of Thursday, futures give a 55% probability for a rate hike in September, up from 52% on 8 June according to the data.
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This past week headline reports showed employers added 280,000 jobs in May, the most in 5 months, while retail sales rose 1.2%. Data released Tuesday showed a record number of help-wanted signs in April drove job openings above hires for the 1st time ever.
Participants believe that the Fed cannot raise rates in here because the economy is too weak. If the Fed goes sooner than the expectations it will create some fallout, the stock market will not like it and sell off.
The measures of implied volatility on currencies and longer-dated US Treasuries have risen to their highest marks since at least the “taper tantrum” in Y 2013 this year, the VIX is hanging within a few points of its Y 2014 average as the stock market has driven to record highs unfazed.
The last time speculators favored VIX calls over puts this much, their timing was good on.
In September, the VIX call-put ratio rose to 4.4, its highest level in 7 years. A month later, the volatility gauge spiked to its highest in 3 years as the S&P 500 dove 9.8%.
If the Fed changes its expectations for the 1st rate hike to later than September in its decision next week, the VIX could move back to 12, around its lows of the year.
Participants have been buying portfolio insurance across asset classes this year and they have now turned their attention to VIX options as other hedges on currencies, bonds and global stocks have become more expensive.
The VIX has been relatively unaffected Vs V2X or interest rates volatility.
Have a terrific weekend.
HeffX-LTN
Paul Ebeling
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