As goes Spain….
Guest post by Vix and more.
Two years ago today, in Spain rallies, I posted a chart of the Spanish ETF, EWP, that showed EWP had rallied off of a bottom and looked like it was poised for a bullish breakout.
In July 2010, I saw Spain as the keystone in the euro zone puzzle:
“Spain is the tipping point in the European sovereign debt crisis as I see it. In a nutshell, as goes Spain, so goes Europe.”
Two years later, I still believe that Spain is the most important line in the sand that euro zone leaders have to grapple with and the country whose fate is probably most intertwined with the future of the euro.
The chart of the week below shows weekly bars of EWP going back five years. The dominant feature in this chart is the financial crisis of 2008-2009. Various iterations of the euro zone crisis can be identified in the bottoms in June 2010, September 2011, November 2011, etc. EWP was in a gradual downtrend from April 2011 to March 2012, but fell sharply until the beginning of June. The most recent bounce in the Spanish ETF still looks somewhat tentative on the charts and is likely to be tested in the weeks and months ahead.
As concerning as the equity situation looks in Spain, the country’s credit default swaps (just 8% off of their all-time highs at 578) and yields on sovereign debt (yields on the 10-year bond are 5% below their all-time highs at 6.95%) indicate an even greater degree of financial stress.
VIX reversal signal around the corner?
Sometimes the simplest ways to analyze the VIX are the best.
The chart of the week below shows weekly bars of the S&P 500 index and the VIX going back three years. In the VIX study at the bottom, I have also highlighted in yellow the zone from 15-18, which has proven to be a fairly robust zone of support for the VIX during this period. Note that while the VIX has slipped below 15 on occasion, it has eventually bounced off of this support level in each instance and, perhaps more notably, a VIX bottom in the 15-18 range has also coincided with a top in the SPX each time around.
With the VIX in the low 17s as I type this, bulls and bears alike should be on the lookout for signs of a bottom forming in the VIX – and be prepared to position their portfolios accordingly.
Weekend VIX and much more in the Top 2012 list
Here are top posts 2012 of Vix and more. Good weekend reading in the midst of considerable turmoil in Europe, China and the United States.
Full list below.
The Evolution of European Equity Risk
Guest post by Vix and more.
There are many ways in which investors can evaluate risk related to the euro zone. Credit default swaps for sovereign debt are one way to evaluate the risk of country default. Sovereign bond yields are a good proxy for a country’s access to funding via the credit markets. The euro crosses and related directional moves are a barometer of the strength of the currency and the euro zone countries as a whole, while various Intrade contracts can lend a sense of the probabilities that investors assign to various events, such as to the risk of one or more countries dropping the euro.
On the volatility side, the VSTOXX (EURO STOXX 50 Volatility Index) the EVZ (CBOE EuroCurrency Volatility Index) provide a market assessment of risk and uncertainty in euro zone stocks as well as the currency.
One piece of analysis I have not seen, however, is an assessment of the relative risk and uncertainty for equity markets in some of the more important euro zone nations. Specifically, Spain, Italy, France and Germany. The chart below attempts to offer up that very information, using 30-day implied volatility for the various country ETFs over the course of the past six months:
VIX, “euro VIX” and Risk before the EU Summit
With markets having put in a nice rally going into the Euro summit, there could be nice opportunities playing the outcome via volatility. Both the VIX and the “euro VIX” EVZ, could be possibly good hedges. If you agree even the slightest with Soros, the market could move nicely after the summit. Some thoughts by Vix and more.
It is not that difficult to come up with data and charts that have many investors wondering if risk and uncertainty are being underpriced in advance of the euro zone summit. Earlier today, I offered up one possible example in Euro Volatility and Risk. Since the VIX receives top billing in this space (and not too long ago carried the mostly tongue-in-cheek moniker, “Your One-Stop VIX-Centric View of the World…”), I thought a VIX-specific example might also be of interest.
The chart below shows the last three months of VIX data, with VIX candlesticks on the main chart on the top. The second chart from the top compares the 20-day historical volatility of the VIX (blue line) with the 30-day implied volatility of the VIX (red line), with the yellow area chart just below it calculating the HV minus IV. Much to my surprise the current 20-day HV is 144, while the current IV is only 98. In other words, the markets expect the VIX to be considerably less volatile in the month ahead than it has been over the course of the last month. I am not surprised to see the gap, but do the markets have the direction of the gap right? In terms of trading opportunities, if you disagree with the market consensus, then VIX straddles probably look fairly cheap right now.
What is the VIX future telling?
Guest post by Vix and more.
The last four days have seen a dramatic decline in all things related to the VIX. The cash/spot VIX is down 26% from last Wednesday’s close as I write this and the VIX futures have followed the VIX down to varying degrees. The graphic below shows the changes in all the VIX contracts during the last four days – a period during which the entire VIX futures term structure has fallen sharply.
As is usually the case, the decline in the front month (June) contract is the sharpest of the group and has actually exceeded the decline in the cash/spot VIX during the same period. With the June contract set to expire at the open of trading tomorrow, it is not surprising that the contract have been as volatile as the VIX index in the last few days. Note that at the other end of the term structure, the back month (February 2013) VIX futures contracts have fallen only 6.8%, about ¼ of the decline seen in the front month futures. Given where we are in the current expiration cycle (right at the very end), the changes in the other months relative to the front month VIX futures are in line with historical norms.
2nd Worse Decline of 2012
Some market charts from the second worst day of the year, by Doug Short.
The selloff in the benchmark S&P 500 was a steady downward slope to the second worst close of 2012, a loss for the day of 2.23%, just a few basis points from the 2.46% selloff on June 1st. What’s to blame? Take your pick: A week unemployment claimsreport, a nasty Philly Fed Business Outlook Survey, slowing worldwide manufacturing growth and rumors of bank rating downgrades.
The index is now up 5.40% for 2012, which is 6.59% off the interim closing high of April 2nd.
From an intermediate perspective, the S&P 500 is 95.9% above the March 2009 closing low and 15.3% below the nominal all-time high of October 2007.
First a 5-minute snapshot of today’s steady downward slope:
Performance of Volatility-Hedged ETPs
Guest post by Vix and more.
An emerging area of interest in the markets in general and in this space in particular is the subject of how to blend volatility exposure – both long and short – into a portfolio.
Clearly the role of volatility in a portfolio is a subject that warrants further analysis and discussion.
It is worth noting that issuers of exchange-traded products have taken several approaches to addressing volatility. The most obvious was the launch ofVIX-based ETPs, such as the popular VXX (iPath S&P 500 VIX Short-Term Futures ETN,) which is a long basket of short-term VIX futures.
Subsequent products have tackled the subject of volatility in a variety of different ways, including:
- Utilize low beta stocks to minimize portfolio volatility (SPLV)
- Employ a market timing mechanism that dynamically allocates between stocks and bonds according to measures of market volatility (VSPY)
- Employ a market timing mechanism that dynamically allocates between stocks and VIX futures according to measures of market volatility (VQT)
- Employ a market timing mechanism that dynamically allocates between long and short volatility positions (XVZ)
The St. Louis Financial Stress Index and Market Risk
Guest post by Vix and more.
Determining the risk in the financial markets should get easier with more data, more measures and more experience navigating crisis environments, right? Not so fast.
Right now, for instance, the CBOE Volatility Index (yes, the VIX does have a formal name) is just a shade above its lifetime average, yet the yield on the 10-Year U.S. Treasury Note is just a week away from its all-time low. Granted the Fed has been distorting interest rates with Operation Twist and other policy initiatives, but it has only been in the last month or so that yields have dipped below 1.7%.
One broad-based tool for measuring risk in the financial markets and related institutions is the St. Louis Fed’s Financial Stress Index (which I refer to as the STLFSI), which has 18 component measures that include a variety of interest rate and yield spread data, as well as the VIX, measures of bond volatility and other data that are correlated with market stress.
This week’s chart of the week below shows the movements in the STLFSI and the VIX since the beginning of 2007. Note that for most of 2012 the VIX has been indicating much less risk and uncertainty than the STLFSI. Only since the middle of May have I observed the VIX rise to a relative level that is consistent with the STLFSI. As of last week, for instance the STLFSI was at the 79th percentile of its lifetime range, while the VIX was in its 82ndpercentile. For the record, the divergence was widest in the middle of March, when the STLFSI had a 68th percentile reading, yet the VIX was mired in the 23rd percentile. Financial historians might also be interested to know that the mid-March divergence was the largest since August 2008…
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