JLN Options: Fear-gauge flashes wild week on Wall Street; ‘Fear’ trade reverses as end-of-world angst eases; S&P 500 posts longest weekly loss streak since 2011

Oct 17, 2014

Observations and Insights


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Lead Stories

Fear-gauge flashes wild week on Wall Street
Matthew Craft – Associated Press
Europe’s economy sputters, oil prices plunge and stocks start swinging wildly. Wall Street’s long dormant “fear index” now predicts more turbulence ahead.
The Chicago Board Options Exchange’s volatility index, known as the VIX, doubled over the past month: from 12 to 26. Although that’s nowhere near the 80 reached in the financial crisis, the recent spike means traders are bracing for more big jumps and steep drops.
***SR: But wait just a minute…

‘Fear’ trade reverses as end-of-world angst eases
Adam Shell – USA Today
When investors rush into the arms of so-called safe-haven investments — such as U.S. government bonds or cash — it’s a sign of risk-aversion. That’s what’s been happening in the recent selloff. But the fear trade may be reversing.
***SR: And the reversal reverses.
***JB: Does anyone else have a particular REM song in their heads when they read this?

S&P 500 posts longest weekly loss streak since 2011
Kate Gibson – CNBC
U.S. stocks rallied on Friday, softening a fourth week of losses, as investors bet on further stimulus from central banks and corporations including General Electric and Morgan Stanley reported profits that topped expectations.
“The earnings season is coming along beautifully. No one is talking down the next quarter or next year based on currency, particularly the big multinationals doing business overseas. Their visibility is still okay,” said Phil Orlando, chief market strategist at Federated Investors, referring to concerns that the strength of the U.S. dollar might increase the price and reduce the appeal of U.S. goods and services sold outside the U.S.

A Handful of Timely Volatility Trades
Russell Rhoads – CBOE Options Hub
VIX is much higher than it was early last week.  So are VXX and RVX.  Also, the S&P 500 and SVXY are both lower.  Anyone can tell you that, so I decided to do some digging and find some timely trades from last Tuesday and Wednesday (or beyond) when the idea of VIX in the 30’s was something that even a permabear would not have imagined.
***SR: We have our own permabear in the office and I will have to ask him when he gets back from Europe whether he would have imagined it.

S&P 500 Bottom Fishers Baited by Volatility Curve
Joseph Ciolli – BloombergBusinessweek
Bulls looking for signs today’s rally in stocks is the start of something bigger are taking signals from options and Standard & Poor’s 500 Index (SPX) charts.
One way of gauging market sentiment is to compare how much it costs to buy options that protect against losses in shares this month versus those timed to expire in 90 days. As selling peaked with the S&P 500 falling as much as 3 percent on Oct. 15, near-term options soared 25 percent above those timed to January, the most in three years.

What’s in Store for the VIX? – Focus on Funds
Johanna Bennett – Barrons
Is volatility here to stay?
That’s a fair question. After all, trading in CBOE Volatility Index (VIX) products has exploded during the past month as stocks have suffered enormous swings.

Small-Cap Stealth Rebound Shows Risk Appetite Still Alive
Joseph Ciolli and Oliver Renick – Bloomberg
The most defensive stocks in the U.S. this week have been some of the riskiest. To Prudential Financial Inc., that bodes well for the rest of the market.
Small-caps, whose 13 percent plunge starting in March presaged losses that have erased $2 trillion from equity prices, are up 3.5 percent in three days, beating everything from high-dividend payers to makers of consumer staples. Strength in the Russell 2000 Index (RTY) comes even as a measure of larger companies known as the Russell 1000 Defensive Index drops.

Advisers tested by spike in market volatility
Trevor Hunnicutt – Investment News
Financial advisers are confronting the possibility that nearly six years of a generally rising stock market has given way to a climate far less forgiving of complacency.
Six days of rollercoaster trading after Oct. 8 almost completely erased the S&P 500 index’s gains for the year (which, as of last month, were close to 9%) as weak estimates of global economic activity pointed to a naggingly slow recovery from a recession that began in 2008 and still haunts financial markets. Another dose of worry and uncertainty was added as public health officials fought an Ebola outbreak.

Market volatility gives liquid alts first real test
Jeff Benjamin – Investment News
One upside to the stock market carnage of the past week or two is that the wildly popular alternative-strategy mutual funds, better known as liquid alts, have finally been tested on the open road.
The results? Well, they’re mixed. But for financial advisers who have watched the liquid alternatives space balloon to nearly $180 billion in more than 470 mutual funds, the sudden surge in market volatility allows for some much-needed analysis based on something other than clever sales pitches and back-tested data.


CBOE Futures Halted Earlier Today in Third Delay of Week
Matthew Leising – BloombergBusinessweek
The CBOE Futures Exchange shut down for 90 minutes earlier today, the third hitch the market has suffered this week as it handled record volume in contracts that allow investors to bet on stock volatility.

Regulation and Enforcement

HFT Firm Fined $1 Million for Manipulating Nasdaq
Keri Geiger and Sam Mamudi – Bloomberg
Athena Capital Research LLC used $40 million to rig prices of thousands of stocks including EBay Inc. (EBAY) for at least six months in 2009, U.S. regulators said today when fining the high-speed trading firm $1 million.
Using a system dubbed “Gravy,” Athena manipulated shares of Nasdaq-listed stocks, undermining the exchange operator’s end-of-day procedures for reducing price volatility, according to the Securities and Exchange Commission. With “high-powered computers, complex algorithms and rapid-fire trades,” the New York-based firm tainted closing prices used by fund managers to track their performance, the SEC said.


The Next Market Crash: How to Prepare for It
Steven M. Sears – Barrons
You would never consider foregoing insurance on your house, so why not insure your stocks, too? When it comes to investment portfolios, which for many Barron’s readers exceed the value of their residences, many investors do nothing. They adhere to a time-heals-all-wounds philosophy that increasingly seems antiquated.
In an era in which the world increasingly behaves like a global flowchart for capital, and volatility is the inevitable byproduct, it makes sense for investors to reconsider equity risk.

Why SPY Action Could Signal Short-Term Pain, Long-Term Gains
Adam Warner – Schaeffer’s Investment Research
As we noted yesterday, a general strategy of going long when the SPDR S&P 500 ETF Trust (SPY) is below its 200-day moving average doesn’t tend to work out so well on a relative basis. That’s mainly because it puts you on the sideline for long-term bull moves, while it also keeps you exposed to short-term implosions.

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