BETA
This is a BETA experience. You may opt-out by clicking here

More From Forbes

Edit Story

Volatility Update: Early Present For Vol Junkies -- Fear Is Back

Following
This article is more than 9 years old.

Sweeping global stock market losses tossed ice water on expectations for quiet trading into the holidays. As the S&P 500 (SPX) shed 3.5% to suffer its biggest weekly loss since May 2012, most measures of market volatility spiked last week.

The CBOE Volatility Index (VIX), the widely watched broad-market gauge of sentiment among players in the SPX options market, sat near multi-month lows at 11.82 as recently as December 5. The index jumped off those lows as falling oil prices dented the energy sector. Increasingly, big moves for oil overnight have been setting off volatility for U.S. markets long before the opening bell (Take today: fresh 5 ½-year low overnight for crude before a bounce that tipped U.S. stock indicators higher in pre-bell trading). What’s more, overseas issues suddenly felt closer to home: Greece’s equities market suffered its greatest loss since 1987 amid political strife last week and China’s main stock index shed 5.3% on anxiety about economic growth. Will the global impact continue for U.S. markets?

Volatility’s Far Reach

As global markets churned last week, the VIX shot up 78% to 21.08. The last time we saw a move in the VIX of this aggressive nature, the SPX moved over double what it did last week— a 7.5% change, not the 3.5% change of last week. And SPX led that move. Last week, VIX led and the SPX followed.

Now, VIX certainly was the big mover among the volatility benchmarks but not the only gainer worth watching (see figure 1).

Fed Marquees Week of Many Catalysts

The potential for fresh drivers picks up this week as the Federal Reserve concludes a two-day interest-rate policy meeting on Wednesday. No changes in policy are expected, but investors will scrutinize economic projections and commentary. Will bankers dump the “considerable time” phrasing used to describe their low-rate stance? The Fed meets as a new round of data on housing, manufacturing, and inflation comes into focus (see figure 2).

The earnings calendar is light. FedEx (FDX) on tap Wednesday morning, Oracle (ORCL) Wednesday afternoon, and Nike (NKE) Thursday afternoon could help set the tone as investors are already looking to the next earnings reporting period kicking off in about a month.

For now, however, the story seems to be macro rather than micro. The precipitous drop in crude oil, from $107.50 per jug in June to the weekend low near $57, has investors concerned about the outlook for the energy sector and other companies that depend on the commodity for profits. Of course, there is a flip side to the energy story—falling prices are typically good news for consumer spending.

And as if the news potential wasn’t dramatic enough, expect to see higher volumes and increased trading activity heading into the “quadruple witching” expiration for December options and futures at week’s end.

Maybe the dust will settle next week as the holiday abbreviates trading. Right now, though, the break feels a long way off.

Good trading,

JJ

@TDAJJKinahan

TD Ameritrade, Inc., member FINRA/SIPC. Commentary provided for educational purposes only. Past performance of a security, strategy, or index is no guarantee of future results or investment success. Inclusion of specific security names in this commentary does not constitute a recommendation from TD Ameritrade to buy, sell, or hold.

Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.