Reminder: Enis and I will be Hosting a Free Webinar Tonight at 4:15pm EST previewing AAPL’s Q2 earnings report and we will debate options trade structures that we are considering to play the event. Register here: http://goo.gl/I93Ay
MorningWord 4/22/13: After first being dictated by wild swings in commodity prices, last week’s price action in the SPX was dominated by U. S. corporate earnings, as it should be during earnings season. At one point on Thursday, the SPX sat almost 4% below the all time high made just one week before, but as expected staged a little bit of a comeback placing the index down just 2.5% from said highs by Friday’s close.
If you are a bear and last week’s volatility got you a little geeked up as we head into the meat of earnings season this week, and a seasonal period that has been particularly volatile over the last 3 years (May-Aug) the chart below of the SPX bouncing off of the bottom end of it’s trend channel dating back to the Nov 2012 lows should make you a tad nervous about pressing the short at this exact moment, 1575 could be in the cards at some point this week..
It’s a tough call at this point, and it’s almost a bit early to get a great read on earnings visibility with less than 40% of S&P 500 companies reported Q1 results yet. While bulls can offer up a GOOG or a CMG for every IBM or BAC, anecdotally, it feels like there have been more high profile disappointments than wholesale beats. My sense is that increased single stock volatility around earnings maybe a precursor to high volatility investors digest U.S. corporate earnings for the next couple weeks and then shift their sights back towards macro headwinds.
The chart below of the SPX vs the VIX over the last 3 years is interesting to visualize how and when the 2 have converged. In all three instances the increased volatility, which led to declines in the SPX of at least 10% all occurred in Q2 and Q3. As the SPX has marched higher during this period it makes sense that these levels of convergence will be higher, but the corresponding moves that will bring these “seasonal” star crossed lovers back together, if they ever do will bit a tad more violent from current levels. Again nothing scientific here, but this little venus fly trap looking chart does not look like the sort of thing you want to get caught in when it shuts.
As Enis detailed in Wednesday’s MacroWrap, when 10 day Realized Vol catches up with that of 30 Implied Vol in the SPX, this has been an attractive time to own protection so to speak:
Realized volatility is rapidly picking up across the market, but implied volatility has not caught up yet. Here is the chart of 30 day IV (blue) vs. 10 day RV (black) in the SPX index:
10 day realized vol in SPX (black) vs. 30 day implied vol, Courtesy of Bloomberg
I’ve circled in red each instance in the past year where 10 day realized volatility jumped above 15 (which is not even that high – that measure was above 15 for most of 2011, for example). Now compare where the 30 day implied volatility (blue line) was at each of those circled instances. In each instance, it rose to at least 15 as well, as realized volatility caused option buyers to price in higher future volatility.
So I guess my main takeaway here is that while we continue to be extended, the re-tracements continue to be shallow at a period where implied vol is still relatively low, despite realized volatility picking up a bit. This is not the normal fear mongering piece, more just an observation that while these relationships can continue to diverge, they can only do so for so long. In the last 3 trading days we have seen a few high profile earnings and guidance disappointments, most recently, CAT’s this morning, a cooling in earnings expectations for the balance of the 2013, coupled with a potential miss to Q1 GDP (to be reported April 26) could cause any strength early this week to retest the low end of the uptrend.