Enis’s Macro Wrap – Vol Is Too Cheap

by Enis July 13, 2012 9:18 am • Commentary

As I write this at 9:10 am, futures now indicate a 0.2% higher open, after showing more strength earlier.  Commodities are broadly higher, with copper and grains leading, up 2% or so, though SLV is my what I’m watching most closely, and it’s indicated up a few cents now.  Asian markets closed slightly higher (0-0.5%) after Chinese GDP came in line.  Europe is slightly higher as well, despite Moody’s downgrade of Italy, sending Italian 10 year yields back near 6%.

One interesting tidbit I noticed yesterday:

SPX was down 6 straight days 3 other times in the last year:
May 11, 2012 – May 18, 2012:  VIX went from 18.83 to 25.10 in those 6 trading days
Nov 16, 2012 – Nov 25, 2012:  VIX went from 31.22 to 34.47
Jul 25, 2011 – Aug 2, 2011:  VIX went from 17.52 to 24.79
As of yesterday’s close VIX had moved from 16.66 to 18.33, by far the smallest move on 6 straight down days.  In this environment, buying premium makes a lot of sense because it is still cheap despite the recent down move.  I plan to buy more again today, likely August.

JPM and WFC both reported, and as someone who focused solely on financials stocks for 4 years of my career, there are 2 obvious trends that will likely continue for the rest of the year.  The retail banking business, making simple consumer and corporate loans, is good.  The investment banking business, involving securities trading, mergers and acquisitions, advisory, and private equity, is doing very poorly.  Volumes were down substantially throughout all businesses.  WFC is slightly lower and JPM is higher by about 2% pre-open, though I don’t plan to change any of my positions.  I expect JPM to underperform following this report, as the “hope” trade deflates after earnings.