If You Plant Ice, You’re Gonna Harvest Wind

The trade war between the leaders of the two largest economies in the world continues to percolate; so too has volatility. Based on historical data, volatility as measured by intraday S&P 500 ranges tends to come in bunches.

U.S. farmers, who have been the primary target for the Chinese in their efforts to counter the Trump Administration’s tariffs, have experienced volatility of their own. According to the American Farm Bureau, American farm exports (soybeans/livestock/etc.) declined by $1.3 billion in the first half of 2019 relative to the previous year. If that wasn’t bad enough, “U.S. agricultural exports to China fell more than 50%” between 2017 and 2018.

Every day since July 30, with the exception of August 20, the S&P 500 has seen a move greater than 1% during normal U.S. trading hours. In other words, 21 of the last 22 trading days have been fairly volatile. It remains to be seen whether this is another “new normal.” For some recent context, between October 10, 2018 and January 10, 2019, the S&P 500 experienced intraday moves of greater than 1% on 59 of 62 sessions.

SPX Daily Trading Inside Volatility Trading 9-4
Source: Bloomberg/Cboe

The S&P 500 21-day average-true-range (ATR) as of August 29 is 29.45. The high for this measure over the past 52 weeks came on December 26 (S&P 500 bottom), with an ATR (21D) of 41.39. If you factor in the overnight session, the current 21-day ATR for S&P 500 futures is 31.45.

As farmers move into harvest season, the S&P 500 moves into what has historically been its worst-performing month. The graphic below comes from Yardeni Research and indicates that over the past 90 years, on average, September is the most challenging month for the large cap index.

Inside Volatility Trading 9-4
Source: Yardeni Research

While temperatures start to decline, the VIX Index has a history of heating up. Cboe Global Markets VIX Index data between 1990 - present (includes 13 years when the VIX Index was calculated using S&P 100 (OEX) options, and 16 years when the VIX Index calculation uses S&P 500 (SPX) options) shows the months of October, November and September registered the highest average VIX Index level.

Inside Volatility Trading 9-4 2
Source: Cboe

The VIX futures term structure continues to toggle between slightly inverted and its more normal contango. The VIX Index is around 18 as August comes to a close, which indicates expected daily S&P 500 moves of roughly 1.125%. Realized volatility is currently running at a slight premium to the VIX Index (21 day Historical Volatility – VIX Index), which is fairly unusual.

Inside Volatility Trading 9-4 3
Source: Bloomberg

August is now in the rearview mirror, and another Fed meeting is on the horizon (September 18). A quarter point (25 basis) cut is all but baked in, so perhaps the broad market will buck the longer-term trend of autumn volatility. Generally speaking, “cheap money” and ample global liquidity have acted as an analgesic for the past decade. Like all risk markets, time will tell.

May the four winds blow you home again?


Vol 44 9-4 NL
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Cboe Will Be Attending:
September 3-6, International Trader Forum (ITF) in Madrid, Spain
September 17, ALTSSEA in Seattle, WA
September 26, Rosenblatt GELC in New York

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.