Four Centuries of Thanksgiving (And a Side of Volatility)

Arguably the finest American holiday is upon us. Our Day of Thanksgiving traces its roots to the earliest Puritan settlers in the New World. The religious separatists who sailed across the Atlantic in the autumn of 1620 were greeted by an especially cruel winter during which half the colonists perished.

In the Spring of 1621, Squanto, a member of the Pawtuxet tribe, is said to have taught the struggling settlers how to grow corn, catch native fish, drain sap from the nearby maple trees, and establish a reciprocal relationship with the natives.

The volatility inherent in everyday life during the 17th century makes today’s concerns about potential tariffs, political head winds and market valuations seem nonsensical. Collectively we have so very much to be grateful for, and in this context, the most substantial bull market in decades is worthy of some recognition.

Inside Volatility Trading 11-26The graphic above is courtesy of The Leuthold Group and illustrates that the S&P 500® total return since the March 2009 lows now exceeds those of every previous bull market since the end of World War II.

Some may take issue with the characterization of a nearly 11-year unabated bull market. In fairness, since “the bottom,” there have been  13 S&P 500 drawdowns of more than 5%. The S&P 500 fell by 19.4% during the height of the European sovereign debt crisis (PIIGS), exacerbated by the first-ever U.S. debt downgrade (8/6/2011). Last year, with the prospect of an escalating trade war and a sharp increase in U.S. interest rates, the S&Ps had a peak-to-trough decline of 19.8%. However, on a closing basis, the S&P 500 hasn’t dropped by more than 20% since 2008. Volatility, as discussed in our last blog, is constant and nondirectional. The velocity of change will ebb and flow, as does the market’s collective reaction. At one point in January 2018, the S&P 500 was up 7.5% month to date. More contemporaneously, between the intraday lows of October 3, 2019 and the November 4 highs, the S&P 500 ramped up by 8.03%. Between October 3 and November 4 of this year, the VIX® Index fell from 21.50 to 12.25. There was a far less pronounced shift in the VIX® Index back in early 2018, because the broad market had been docile for the proceeding months.

Cliff Notes: upside and downside volatility do not elicit the same response.

To wit, in the 11 weeks between early September 2008 and November 20, the VIX® Index advanced 268% from 21.99 to 80.86 (highest close ever). Over the same time frame, the S&P 500 lost 41.1%. Lehman Brothers filed for Chapter 11 bankruptcy on September 15. Volatility is constant and can shift quickly. (Intraday VIX® Index high October 24, 2018: 89.53.)

While it’s not equivalent to the early settlers dealing with a bitter New England winter and scurvy outbreaks, most of 2008 wasn’t pleasant.

Eleven years removed from some of the most acute broad market volatility in history, the S&P 500 has been very stable. SPX 10-, 20- and 30-day historical volatilities are each at the lowest levels since late April 2019 and early October 2018.

The open interest (OI) in VIX® futures has been steadily increasing since early September. It’s currently at the highest levels since October 2018. According to recent CFTC Commitment of Trader Reports and CFE market data, the growth in OI is being fueled in part by increased allocations to VIX® ETPs (long volatility). On the short side, the trade has largely been driven by hedge funds and asset managers. Hedge funds have their largest short position (173K) since January 2018, and asset managers have their largest short position ever (135K).

Inside Volatility Trading 11-26 2
Sources: CFTC and CFE

VIX® futures open interest does not presage moves in the VIX® Index or the S&P 500, but here’s a look at four recent inflection points for VIX® futures OI. The current VIX® OI exceeds the levels from late July and mid-April of this year, but is slightly below the peak from September 2018 and well below January last year.

Inside Volatility Trading 11-26 3
Source: Bloomberg

One other point to note: On November 21, 2019, the Cboe Index Put:Call ratio hit the highest level (2.16) since September 2010. Prior to that, you have to go back to early August 2007 to find a higher measure. The average over the last 52 weeks has been 1.19.

This is in part attributable to the fact that SPX call volume (256,160) was the lowest since July 9 (238,098), and prior to that, April 11 (209,948). On November 11, the SPX℠ Put:Call ratio was 2.9, which compares with a 1-year average of 1.78 and a high of 3.07 (8/21/2019).

Inside Volatility Trading 11-26 4
Source: Bloomberg

As we take a day to reflect on our many good fortunes with a side dish of football (jaded Chicago Bears fan), give thanks for an S&P 500 just off all-time highs and most equity volatility measures indicating clear sailing. Be aware that the outlook can shift quickly, as it did for the Puritans who arrived on the Mayflower almost 400 years ago.

Cboe Global Markets and CFE Thanksgiving holiday hours 



Notable Trades 11-26

The week's VIX Index Dynamics

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Cboe Will Be Hosting:                                          
December 3-4, RMC Tel Aviv in Tel Aviv, Israel               
December 10, CAIA Chicago in Chicago  

Cboe Will Be Attending:
December 3-6, FIA Annual Asia
 in Singapore     

For questions or to provide feedback on the newsletter, please email Alexa Auerbach, Director of Product Marketing, at [email protected] 

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