Market Volatility Bulletin: Friday The 13-Vol

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Market Intro

SectorSPDR: 2:18PM EST

After an upbeat session in overseas markets (EFA, EEM, ACWX), US equities (SPY, DIA, QQQ, IWM) began Friday on a strong note, and since then have returned to a day of mostly “unch”.

The 10YR UST yield (IEF, TLT, AGG) is up near 1.90% as the week draws to its end. Even so, spot volatility is readying to close Friday on the verge of 13-handle territory, having reached near two-month lows with a print near 13.50 in today’s session. Pretty quiet Friday the 13th on the whole.

Materials (XLB) have had a good week, while real estate (XLRE) has suffered (see below).

Thoughts on Volatility

CNBC

Man, those rates rose quickly! Perhaps the rates environment is responding to the more constructive tone of trade negotiations. The 10YR UST hit a low of 1.43% on September 3rd… we’re up 45 basis points in 10 days, more or reversing the equally fierce drive lower they began in earnest in mid-August.

Naturally, rate-sensitive sectors such as real estate are going to feel the sting.

This CNBC article may be getting ahead of the markets though. How one defines “the beginning” can perhaps frame one’s perspective. But rates can perform head fakes, just like bull and bear markets in equities can rattle investors by featuring quick reversals.

I am increasingly keeping an eye on volatility in rates these days though, as they may form a major source of influence for equity vol (see below).

Econoday

Autos made for a strong showing on the retail sales report today. Take away vehicle sales and the metric is less impressive. It’s a widely touted them these days that the consumer is what’s holding the economy together. I find it encouraging that Americans still feel confident in making big-ticket purchases such as new cars, as it speaks to strong sentiment.

I very much concur with Liz Ann Sonders’ statement above: the US debt/deficit are clearly no longer a concern for either side of the aisle, other than the potential to score political points with their bases.

Fiscal discipline is key to a well-functioning and sustainable economy. Running $1T deficits during a time when there is neither a major armed conflict nor a recession does not bode well. It may feed and calm markets in the here and now, but it augurs for tough times ahead.

Term Structure

Even on past trips lower, spot VIX took some pauses to reverse course. I think we’re getting pretty close to that time again.

If you believe that the environment is going to more or less remain the same as now, those reversals are good for adding to a short-vol position (SVXY, ZIV).

A lot of players seem to have gotten quite confident about smoking vol though.

Probably too late for it to matter much for the September contract, but I’d consider shorting the V-X (Oct-Nov) VX futures spread sometime next week.

For those who find that to be a little aggressively long vol, you could do the same basic trade with the X-Z (Nov-Dec) pair.

MarketChameleon: BND implied vol (teal) vs. SPY (red)

For those who are interested in getting started in options, eyeing fixed-income products with low vol can be an interesting way to observe how they behave.

Unfortunately, neither Vanguard’s BND nor the iShare’s AGG are very liquid, and so I would not advise actually trading with these underlyings. But there are phantom accounts you can start and trade with play money. While some of the more traditional products are more interesting, starting in a calmer space can ultimately prove to be more constructive.

Wrap Up

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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.

Additional disclosure: I actively trade the futures and options markets, potentially taking multiple positions on any given day, both long and short. I also hold a more traditional portfolio of stocks and bonds that I do not “trade”. I do believe the S&P 500 is priced for poor forward-looking returns over a long time frame, and so my trading activity centers around a negative delta for hedging purposes.