Hello October, Our Old Friend

October is upon us. For those in the northern hemisphere it means fall is in full swing complete with football, falling leaves and chilly weather. It also means that in a number of countries around the globe All Hallows’ Eve – or Halloween – arrives at the end of the month

Some might say that U.S. markets began the month with a spooky move. On October 1, the first day of the fourth quarter, the S&P 500® lost 36.49 points, or 1.23% to close at 2940.25 after a survey of manufacturing purchasing managers showed a second month of shrinkage and the weakest result since June 2009.
Inside Volatility Trading 10-15Source: Macro Risk Advisors, Bloomberg

The Institute for Supply Management’s Purchasing Managers Index (PMI) produced a reading of 47.8 for September that fell well short of expectations. That marked the second consecutive reading below the 50 threshold, which is an indication of contraction. The last time PMI came in that low, the economy was in the middle of the last recession. The immediate phrase that comes to mind: Uh Oh.

On October 2, the market received ADP National Employment Report that showed private payrolls increased by 135,000 in September. The report was a positive sign that showed the private sector created more jobs last month, but the pace was slower than expected amid growing signs that the labor market is getting tighter.

On that day, stocks extended those losses even further as recession worries ratcheted up even higher. The S&P 500 lost 52.64 points, or 1.79% and the Cboe Volatility Index® (the VIX® Index) closed above the 20 level (20.56). The last time that happened was on August 27, 2019 (20.31).

On October 4, the unemployment (September) report showed that nonfarm payrolls rose by 136,000, a bit shy of the consensus forecast of 150,000, but that was after upward revisions totaling 45,000 in the two previous months. Additionally, the unemployment rate dropped to 3.5%, which is the lowest rate since December 1969.

The market was enamored with the September job report numbers, and the S&P 500 responded by rising 1.42%. The report was perceived as a symbol of optimism that a certain resilience can be seen in the September jobs data, which potentially raises hopes that the economy can avoid a recession in 2020.

Inside Volatility Trading 10-15 2
Source: Bloomberg

In just a few trading days, October has given us some renewed volatility. The graphic above shows SPX℠ one-day index price changes as a percent. So far this month, six out of nine trading days have yielded one-day changes greater than 1%, showing that volatility often comes in clusters.

In our September 4 newsletter, we highlighted that historically, October has the highest average VIX® Index value, with a reading of 21.73. Thus far, October 2019 is living up to the historical hype. There has been a noticeable increase in the amount of protection that market participants are seeking.

Inside Volatility Trading 10-15 3
Source: Bloomberg

As of October 11, the SPX℠ put-to-call open interest ratio, with a current reading of 2.40, is the second highest reading in the last 10 years. It is only eclipsed by a reading of 2.76, which was recorded on July 5, 2019.

A glance at one week’s worth of VIX® term structure data shows that market participants have had to remain flexible with the opinions on volatility. Term structure has varied between contango (Oct. 7, 10 & 11), flat (Oct. 9) and inverted (Oct. 8), all within five trading days.

Inside Volatility Trading 10-15 4Source: Cboe LiveVol

There appears to be a bid to volatility in the market right now for a variety of reasons. There have been incessant discussions between U.S. and Chinese representatives regarding the trade war. The impending departure of the U.K. from the EU (Brexit) on October 31 will almost certainly be a must-watch event. Additionally, it has been nearly three weeks (September 24) since the Speaker of the House announced a formal impeachment inquiry against President Trump.

Every day brings a new headline. So, buckle up buttercup: This ride is likely far from over.



VIX Index Tumbling 10-15

Video — VIX Index Tumbling

MFA Outlook 2019

Cboe Will Be Attending:
October 17, MFA  Outlook in New York, NY
October 24, Zurich Volatility Investing Event in Zurich, Switzerland
October 29-31, FIA Expo in Chicago, IL

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.