The first week of any month has the most busy economic data calendar, as it usually includes the ISM Manufacturing, ISM Non-Manufacturing, and Non-farm Payrolls Reports. But this week’s economic data is especially crucial.
Bernanke’s testimony on May 22nd made it clear that further stabilization in the data over the next couple months will likely lead to tapering by the September meeting. As a result, this week’s releases take on extra importance, with a likely setup that good news for the economy is bad news for the markets and vice versa. The reaction to today’s ISM Manufacturing data, released at 10:00 am EST, will be the first sign of how the market is likely to react to the most important release – Friday’s 8:30 am EST Non-Farm Payrolls number.
Interestingly, the options market was implying a break-even range of about 30 points in either direction for the S&P 500 this week. That’s to say that the SPY at-the-money straddle expiring on June 7th closed this past Friday priced at about $2.85. The break-even levels implied by that straddle are 160.60 and 166.30 for this Friday’s close. Not surprisingly, option markets are implying greater volatility for this week, given all the data releases, than for any week over the past month.
The VIX was strong all week last week, partly in anticipation of this week’s data. But every move higher in the VIX has been sold in the past year, and the VIX has not closed 2 straight days above the 20 level since June 2012. The 2 year daily chart with the VIX 20 level highlighted in red:
One sign of potential complacency in the vol market that I’ve noticed is the increasings short interest in the VXX ETF over the past month. The VXX is a poorly constructed ETF that generally bleeds lower because it rolls the VIX futures contract from month to month, when VIX futures are usually in contango (so the VXX sells the lower front-month contract, and buys the higher second-month contract, month after month after month). However, in the past 2 months, the VXX has actually been relatively unchanged even as the SPX has moved higher, as the VIX has held up. In the meantime, short interest on the VXX has continued to grow, increasing from around 35 million shares short in March to almost 50 million shares short today:
That increase in short interest has occurred while VXX has actually been flat, a rare occurrence for the ETF over the past few years. The 3 year chart shows just how poorly this ETF has performed over time:
Clearly, VXX is a terrible security, and a long-term value loser. But that long-term, uninterrupted decline has likely bred complacency among traders, evidenced by the increasing short interest in the past 2 months in the face of a flat VXX. I am currently long VIX through this trade, and prefer trading VIX options rather than VXX given the poor structure of the VXX ETF. But I am closely watching the VIX futures curve. If the June VIX future moves above the July VIX future, I think you might see a nasty, rapid short squeeze in the VXX ETF, as complacent VXX shorts finally feel some pain.
Should be an interesting week on many fronts. Good luck.