Article / 06 June 2016 at 14:41 GMT

Volatility Update: Markets stalling on lacklustre econ data

Product Manager Futures and Options / Saxo Bank
  • NFP ensure that  Friday's session traded mixed
  • Dubious about stocks, investors turn to bonds and gold
  • VVIX barely acknowledges any tremors in next 30 days
By Georgio Stoev

The shortened week (US markets were closed on Monday) provided for more antagonism for both bulls and bears. The highly anticipated monthly data from US Labor Department showed a meagre 38,000 jobs added in May, short of the expected 158,000. As a result, Friday's session traded mixed. S&P 500 tested the lows of 2085 intra-day and gradually recovered before the bell to close at 2099. Here's how different sectors and markets finished.


Source: Saxo Bank

Past trade ideas

One could expect equities to continue to struggle in overcoming the 2-year highs (2132) on the back of Fed tightening. While investors continue to be dubious about owning risky assets (stocks) they turned to bonds and gold. The trackers for GLD and TLT gained 2.4% and 2.8%, respectively. We initiated a trade view early GLD in the month. 

For TLT,  we entered an Iron Condor, a delta-neutral strategy, on the expectations that bonds will continue their consolidation between $127 and $133. On Friday, bonds rallied as concerns about soft economy and even contraction surfaced. While the price of one of the safe heaven US Treasury spiked, yields on the long-end dropped to historically low levels of 2.53%. 

Volatility? What Volatility?

While the pop in the above safe heaven assets may have suggested playing the defense, there was nothing in the VIX indicating so. The fear gauge failed to break above it $16.34- its 3 month resistance. In fact, the volatility of the volatility (VVIX) barely acknowledges any tremors in the next 30 days. 

VIX Daily
 Source: Saxo Bank

Nonetheless, we are seeing different markets at infliction points (near support/resistance) and with this the possibility for the Vol to expand. Something ought to give at some point. 

European equities were also largely flat last week and just a tad above water year-to-date. Yet, we do have a convergence in the implied volatility versus the historical volatility. In the past this has signaled turbulence. 

IV vs HV

On the radar

The financial sector is one of the sectors that is a direct beneficiary of increase in short-term interest rates. A typical commercial bank holds massive amounts of cash from depositors. An increase of the yield on cash tends to impact their bottom lines. The price of the tracking exchange-traded fund XLF is up 21% since February low. Shares of the largest US bank, JP Morgan, naturally have followed suit and recovered. However, we are seeing a divergence in the sentiment indicators. A divergence could signal a major shift in the price of the underlying.

A positive divergence could occur when the price of the underlying is making a new low, while the oscillators are moving higher. In a negative divergence, as in the case of the JPM, the price will continue to move higher but the oscillators will stay flat or move lower.  The last could be bearish.

 Source: Saxo Bank

Have a great week ahead!

– Edited by Clare MacCarthy


Georgio Stoev is futures and options product manager at Saxo Bank 

06 June
Market Predator Market Predator
Hello Mr. Stoev, it's nice article. I like all this special ETFs (TLT, XLF .....) to measure market sentiment. Maybe special webinar dedicated to this issue might be very helpful for newbie like me. :-) Thanks, I like your's ideas.
07 June
Georgio Stoev Georgio Stoev
Thx! will consider it.


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