Market Volatility Bulletin: Long Vol Has Some Support Here, But VIX9D Takes A Tempered Stance On Run-Up

Get ready for another interesting day, folks! USO collapsing? It’s a high-volume ETP with 100MM shares of average daily volume over the last three months.

US stocks (SPY, DIA, QQQ, IWM) are set for a lower open. Spot VIX is tracking up into the high forties. Both Asian (AAXJ, EWJ) and European bourses (VGK, EWG, EWU) have headed into retreat mode, with major indexes down between one and four percent in Tuesday trade.

The USD (UUP) is higher, as are Treasurys (IEF, TLT).

Thoughts On Volatility

Thank you, thumbsoup, for adding a resource that may interest those of us who want to get some sense of how the CARES package may be altering incentives for employers and employees (see the link). I recommend that readers check it out, and add your own thoughts and interesting reading material on the topic for that matter.

The CARES Act is rather stunning in terms of its speed, size, and comprehensiveness. In some ways, that is exactly what in theory we’d like in a fiscal stimulus package. And no legislation for a nation as large and diverse as the US is going to fit every circumstance. I myself get concerned that, in keeping with thumbsoup’s comments above, the benefits may need to be extended into the future, which in turn hints at an exploding fiscal deficit. As a one-and-done solution to the existing crisis, however, I believe the stimulus targets the predictable issue in demand destruction; let’s just hope that the optics and incentives don’t turn into a perverter of supply.

…and that was a couple hours ago. Now the June contract is down just shy of 32% to a crushing level of $13.98/barrel. Plenty of time and liquidity left on that contract. Even the July and August contracts are down over $3/barrel, at least as I write this.

Black gold has often been called the life blood of the global economy. It is certainly possible that animal spirits have gone into extreme reverse, and unbridled irrational fear has taken hold on this market.

But we also need to consider that other risk assets may be way out in front of their skis in terms of calling the turnaround. If we’re all going to be back to work and our regular spending patterns, wouldn’t oil be rebounding? This especially after OPEC’s landmark agreement to pull record supply.

SectorSPDR

For those looking to take advantage of the panic, I have a couple thoughts to share:

  1. The shares are actually not that far below where they were trading once the panic really set in back around March 9. From that perspective, XLE is perhaps not too different from any of the other sectors. The key, however, is that oil has positively collapsed, even since that early-to-mid March perspective. I understand that there is more to the US energy sector than what is happening to some near-dated CL contracts, but the point remains that things are looking shakier for the sector.
  2. Even more so than usual, it can make sense to value diversification. Screwy things happen when markets find themselves at pivot points. Carefully managing pairs trades, opting for baskets such as XLE over individual names, etc, can be quite wise when the underlying product being sold is going nuts to the down side.

Term Structure

At the 180-day mark, today’s term structure is as high as it’s been over the comparative term structures that I am featuring, which go back to close of trade, March 31.

The VX1 has perked in the early part of today’s session. The fact that Asian and European markets were sympathetic to the poor close in the US markets yesterday, when coupled with the demise of the Jun CL contract this morning, leads me to believe that the upward-bound action in the near-dated contracts has plenty of room for follow through. I don’t always side with momentum, but I think the case is pretty darn decent here (VXX).

Google Finance

That said, the more sensitive VIX9D metric is not flying off to the moon this morning. Up, sure. And 46 vol points leaves all kinds of room for interesting movement in the SPX. But this short-dated version of the VIX can truly fly or tumble in breathtaking fashion, and that’s not what we’re seeing, at least not so far. So while I’d say that vol longs appear to have grabbed the tape for the time being, not all metrics are exactly screaming for follow through. Also, it is worthwhile to comment here that many sectors are actually benefitted by low oil prices, and by now the energy sector only makes up about 3% (less actually) of the broader S&P.

Wrap Up

If this is your first time reading Market Volatility Bulletin, thanks for giving it a try. If you’re a regular, I thank you for your ongoing contributions in the comments section.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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