Article / 22 May 2017 at 12:19 GMT

Volatility Update: Markets wobble on White House worries — #SaxoStrats

Product Manager, Options Trader, Educator
  • S&P 500 drops near 2% in one day on Trump worries
  • Volatility (VIX) spikes most since last September
  • Crude oil advances on optimism about further production cuts
  • Gold gains on improved sentiment
  • Treasuries rally as investors look for cover

The White House
 Only President Trump's Middle East trip has seemed to bring a pause to 
the non-stop turmoil surrounding the White House. Photo: Shutterstock

By Georgio Stoev

More controversial comments coming from the White House sent equities lower across the globe last week. The bulls, however, responded the very next day and used the weakness to add to their positions the next day. These quick, knee-jerk reactions seem to be very typical in a consolidation pattern.

E-mini S&P 500 futures (ESM7)esM7 braodening
Source: Saxo Bank

Investors using technical analysis to study market behaviour refer to this consolidation pattern as a broadening formation.  Looking at the E-mini S&P 500 futures (ESM7), we should note that the intra-day high of 2,397 on March 1 was tested on May 8. The rally failed to materialise, and the intra-day high of 2,404 still stands. As a result, the trendline is starting to diverge, with the moving average convergence divergence (MACD) also indicating that, creating a formation that technicians would call an expanding triangle (weakening trend).

While volume tends to diminish in tightening ranges, it tends to be heavier in broadening formations, supporting the wider price range. According to CME Group data, volume in ESM7 has more than doubled in the last three trading sessions to an average daily volume of 2.2 million from 1 million. Unusual volume and unusual emotions. The technical pattern is usually a bearish formation.

ES Volume Source: CME Group

The Open Interest Summary from our friends at QuikStrike enables us to take a deep dive into this crazy action and dissect traders' activities. Lightening up were the 2,300 strikes on the put side with as well as 2,400 and 2,450 on the call side. While most of the calls traded back expiration, most active puts were with short-term expiration, using the ES weekly options. The very near-term duration could suggest that these positions were mostly on the short side.

ES Open Interest
Source: QuikStrike

There's been plenty of volatility in other assets classes, such as energy, gold and even bonds. Here's a summary for the week of May 15-19:

Weekly Report

Crude oil (CL) climbed above $50/barrel and continues to make headway. The recovery is largely based on geopolitical uncertainties as well as production cuts. A largely anticipated Opec meeting is scheduled for this Thursday, May 25, and Nick Howard will provide a preview of this event with the first CME Group/Saxo Bank joint monthly webinar. To hear Nick talking about WTI and other of your favorite products make sure to reserve your place here

In addition to the Opec meeting, the oil market is also waiting for a weekly inventory report from the US Energy Information Administration on Wednesday. 

Treasury yields are back down as investors flocked back into bonds, bidding up prices. Again geopolitical concerns, for instance over the French elections, North Korean missile tests, and so forth, have made investors particularly buy-side nervous. This could explain why interest rates were one of the most liquid products in the first quarter for the CME Group. Furthermore, seeing increased demand for risk management tools, the exchange is due to list weekly options on treasuries on June 5.

With the increased volatility in the marketplace, investors could benefit from augmented premium. We initiated an index trade last week using SPX options.

You can also substitute purchases of underlying assets, such as equities, by selling cash-secured puts where appropriate. Shares of German sports equipment maker Adidas AG have had a phenomenal run, and the current pullback could provide investors with a good entry point. Investors could sell the 21 July 165 put and collect 3 euros per contract, while the underlying is trading near 170 euros.

— Edited by John Acher

Georgio Stoev is futures and options product manager at Saxo Bank


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