SPX/Nasdaq Volatility Analysis

[wayneL]

Hi Folks

I thought it might be interesting to post a weekly volatility repert on the US indicies to see if we can spot any option trading opportunities. So here it is:

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This report is for the week ending 7 July 2006.

The Volatility Report seeks to examine the volatility present in the Major US indicies for to see if there are trading opportunities on the basis of statistical and option Implied Volatilities.

I don’t seek to offer any comprehensive technical analysis or any attempt to pick direction in the market apart from that which may be suggested by volatility. There are already hundreds of resources for that sort of analysis. I am looking at a range of statistical and implied volatility measures which are detailed in the links on the left.

Lets first have a look at the S&P 500 price chart.

Only a 4 day week because of Independence day, the S&P didn’t do a lot after the rally last week, but finished off with a down day on Friday. We are still above the 200 DMA but below the 50 DMA; so no clear trend present.

Having a look at the statistical volatilities (see this link for explanation of the indicator http://thevolatilityreport.com/volblog/nfblog/?page_id=16);

we can see that 30 day SV is right up at yearly highs and > 2 standard deviations from 260 day SV benchmark. This market, despite the quiet week,is still very statistically volatile. Even the 6 day measure is up around 15%. This is quite clearly abnormally high and we could reasonably expect SV to start topping out and in fact settle down towards the benchmark figure at some stage. If we have another week like this one, that will be realised.

Now looking at the SV/IV chart:

The Implied Volatility of the SPX having peaked at nearly 20% in mid June (signaling a potential bottom) has already settled below SV and is currently just over 12%. This is telling us a lot of fear has come out of this market. This doesn’t necessarily mean a rally, just that the market is expecting more normal volatility. No crash for now

more...

 

[wayneL]

OK having a look at VIX; and this week I want to plot it in conjunction with VXN:

Firstly to VIX in the top pane. The VIX is telling an identical story to SPX IV; no surprises there. But if you look at VXN on the bottom, it is lingering at relatively higher levels. Could this be a sign of some trouble? A bit tenuous at the moment, I agree, so lets have a look at the Q’s (NASDAQ tracking exchange traded fund):

Although this chart has some support at around $37.15, it is below all the major MA’s. There is not enough here to make me outright bearish, but the NASDAQ doesn’t look healthy.

Conclusion: My view is that even though SV is so high, this is reflecting what has gone and options are probably at about fair value. I would rather be a buyer than a seller if I was initiating a trade right at the moment, but I probably wouldn’t take a new trade at the moment, not based on volatility anyway, no real edge there. People who wrote options in mid June however, will be happy and should collect on the 22nd without having to defend their positions

 

[wayneL]

I’ve decided to update the Volatility Report for the NASDAQ with some some charts becuae I think the Nasdaq is at the crossroads right now. What the Nasdaq does from here could be a leading indicator for the broader market.

First lets look at price:

As mentioned in Fridays report the NAZ is below all the major moving averages and has now tested the support I have drawn in, but has NOT at this stage closed below it. This is a critical juncture IMO.

OK let’s have a look at vols:

As also noted in Fridays report, VXN (yellow line)has been lingering at higher relative levels than VIX and it ticking up towards some of the higher levels experienced in June. This shows a bit of worry in the NAZ. Obviously no panic yet, but definate worry. People are buying puts and pushing premiums up. The market is predicting that we may see current levels of SV maintained.
I think the next few days are going to be critical for the medium term outlook and may just decide the fate of the broader market. Speaking of which, lets have a look:

The S&P 500 is telling a somewhat different story both in price and IV. VIX is still settled into a level that is fairly close to normal. However I think price is looking for a bit of direction. If one gives any credence at all to the major moving averages, then this market is looking for a direction to jump.

Could that cue come from the NAZ? Coulds VIX be about to take off? Is there a trade in there, should we be looking to go long vega and be buyers of premium on the SPX or OEX?

I think we’ll get our answer very soon.

 

[wayneL]

Europe might be supplying the answer:

http://www.marketwatch.com/news/story/Story.aspx?guid={8CA97506-D678-48C5-8321-A5A426CD837F}&siteid=

EUROPE MARKETS
European shares decline amid tech pressure
Alcatel slides after Lucent Technologies warns on revenue, profits
E-mail | Print | RSS Feed | Disable live quotes
By Sarah Turner, MarketWatch
Last Update: 3:53 AM ET Jul 11, 2006

LONDON (MarketWatch) - European shares lost ground on Tuesday, pressured by the technology sector, after an overnight warning from Lucent Technologies weighed on its acquirer, France's Alcatel.
The U.K. FTSE 100 index (UK:UKX: news, chart, profile) declined 0.2% at 5,885, the German DAX Xetra 30 index (DX:1876534: news, chart, profile) lost 0.6% at 5,673 and the French CAC-40 index (FR:1804546: news, chart, profile) slipped 0.3% at 4,968.
The pan-European Stoxx 600 index (ST:SXXP: news, chart, profile) eased back 0.4% at 321.06, with technology shares leading decliners...

 

[wayneL]

From the blog.....

I’m going to continue down my line of thinking of the Nasdaq100 leading the market.

Yesterday it looked as though 1512 was going to be the line in the sand for the Nas100. What with the apparent bot attack (program buying) in the afternoon, I and others were really looking for some follow through today.

Instead we see a break of that 1512 support and as of 3:40 EST as I write this, it looks like it will close beneath that support. That is also a new 2006 low.

The more significant thing is the reaction of IV’s. We have VXN at 22% now and VIX at 14.7% at the time of writing. This, on a day I fully expected VIX to go under 13%. Sheesh!

VXN is now now making a beeline for 2006 highs as folks are bidding up puts to protect their portfolios. The question is, is whether the Nasdaq is leading us into a nasty bear. Is this what volatility is telling us?

As ever, it remains to be seen, and “one swallow does not a summer make”, but the Nas is certainly giving the broader market a tug in that direction.

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And you know what that means for the ASX... resources could still do alright for a while though.

Cheers

 

[pacer]

Is there a reason for the big spike a little while ago?...went to 100 then fell back again....according to yahoo's graph anyway, it might just be a mistake.