Danger, I’ve Been Told to Expect It
By most (short-dated) measures, SPX historical volatility is quite low. The SPX 10- and 30-day historical vol measures are 6% and 7.4%, respectively. The only other recent corollaries in terms of market calm are May 2, 2019 (SPX 30-day 7.4%) and October 9, 2018 (SPX 30-day 6.1%).
In both recent instances, there was a fairly significant pullback that followed.
On May 1, 2019, the SPX made another new all-time high. Between the highs on May 1 and the intraday lows of May 13, the S&Ps lost 5.2%. There was a brief relief rally before another move lower. On June 3, the S&Ps reversed course and have been rising steadily since. The May 1 – June 3 peak-to-trough drawdown was 7.6%.
On October 3, 2018, the SPX retested the highs from September 21, 2018 (2940.91) and failed. From the October 9 highs through the October 29 lows, the S&P 500® declined by 6.5%.
This is not necessarily an indication that an appreciable market shift is on the horizon, but it’s something to be aware of. If we look back to much of 2017, both realized and implied vols remained largely muted.
From a historical standpoint, 2017 was either the least or second-least volatility year for the S&P 500 (1965 comparison). 2017 also marked the lowest intraday measure for the VIX Index (8.56% 11/24/2017) as well as the lowest average reading for the Index (11.1%).
There are some potential catalysts for future and implied macro volatility. Earnings season is in full swing, but generally speaking, overall market volatility tends to decline during earnings as single-stock names move but cancel one another out from an overall standpoint.
However, in a recent report from Credit Suisse, Mandy Xu, their chief equity derivative strategist, argued that the options marketplace may be underestimating the potential volatility of this earnings cycle. J.P. Morgan Chase Strategist Bram Kaplan proffered a similar thought, stating, “We would be generally biased toward being long single-name volatility into earnings.”
Also of note is the ongoing underperformance of small cap names as measured by the Russell 2000 (RUT). One might anticipate that the strong U.S. dollar and effects of the percolating trade war with China (in particular) would weigh more heavily on the global large caps, but that’s not been the case.
Lastly, the expectation of future accommodation on the part of global central banks will be put the test in the coming weeks. The European Central Bank meets on July 25, and President Mario Draghi may indicate a willingness to act at future meetings (September) with inflation figures across the eurozone running well below their 2% target.
On this side of the pond, the Federal Reserve Open Markets Committee will meet at the end of the month, and the market fully expects a rate cut. The uncertainty revolves around how aggressive the Fed will be on July 31. Fed Funds are currently pricing in a slightly greater likelihood that the Fed “only” cuts by 25 basis points instead of a half point reduction.
Plenty to keep our eyes on as the “dog days of summer” roll on.
Video: A $VIX options trader buys 85,000 AUG 19 & 90,000 SEP 23 $VIX calls while the $SPX is hovering just below 3000 as earnings continue to be reported.
Cboe Will be Exhibiting:
July 22-24, Opal Public Funds Summit East in Newport, RI
Cboe Will Be Attending:
July 31, FIA Annual Summer Outing in Chicago, IL
August 19, FIX Nordic Trading Briefing in Stockholm, Sweden
August 28, SGX Market Access Charity Night in Singapore
For questions or to provide feedback on the newsletter, please email Alexa Auerbach, Director of Product Marketing at [email protected]
To learn more about the VIX Index, visit www.cboe.com/vix.