Market Intro



CNBC: S&P 500



CNBC: 10:20AM EST

US stocks (DIA, QQQ, IWM) aren’t doing much of anything in the Wednesday session, and for that matter, the S&P 500 (SPY) approaches the middle of its five-day range (approximately 2,980 to 3,012).

The sectors display a mixed pattern today: discretionary stocks (XLY) are dragging about .6%, while communications (XLC) posts .65% gains on the morning session.

International equities (EFA, EEM, ACWX), perhaps stymied by the prospect of further Brexit delays, have also failed to move compellingly in any particular direction.

Thoughts on Volatility



McDonald’s (MCD) got crushed yesterday when earnings failed to impress – falling about 5% on Tuesday. Charlie Bilello shares a graphic that in my view underscores a stock that was long overdue for a reality check.

I don’t much like the P/S comparison with Amazon. AMZN runs its retail business on pretty tight margins (yes, I understand that there’s more to Amazon these days), and the two companies are in fundamentally different businesses.



Deflation is not dead! Well, at least if you decide to count 1.5% CPI as the baseline. Across the board, implied probabilities for higher inflation have come down quite a bit in 2019.

This gives monetary policy makers more room to support asset prices. When inflation does sustainably perk up, central banks won’t have much choice at all but to combat price increases. That will necessarily require them to raise rates, regardless of any commotion that surges in risk assets.

We got something of a taste of this threat in early 2018. Many don’t remember the seething hot January jobs number that precipitated the dump in equities and, ultimately, the famous Feb. 5 VIXplosion.

For now, such fears appear to be more of a backburner issue.



A wave of mass protests have hit the scene in 2019. Certainly Hong Kong has grabbed a lot of investor attention, but by no means is the city state an isolated incident.

I’m not a particularly avid follower of Bitcoin, but I can see where cryptocurrencies could under the right circumstances make up an important flight-to-literal-safety component of investor portfolios.

Term Structure



Spot VIX matches 20-day HV pretty perfectly. Recall the tension from early October that sent the averages throttling lower. The most recent 10-day window has exhibited significantly lower levels of market volatility.

As of the time of writing this piece, spot VIX lay 11.7% below the M1, which expires on Nov. 19. In light of the ultra-low HV10, one can certainly make the case that the most natural path for spot is downward, perhaps even toward 11.5 or so.



VVIX has fallen about 15 points or so since earlier in the month. VVIX is the price of volatility on near-dated VX futures. As such, the declining VVIX indicates a stabilization in the volatility markets. That is to say that the base case now appears to be a drifting action in VX futures as opposed to a quick, jerky movement. Of course, we want to keep perspective here: 88 is still a very high vol reading when compared against indexes such as SPX!



MarketChameleon.com: VXX Implied Vol Term Structure

Not unlike what we witnessed in July of this year, the VXX term structure is widening out a good bit. Today’s 30-day implied vol readings haven’t quite reached the lows of late July (nor has spot VIX for that matter).

For those looking at shorting volatility by shorting VXX products, protection is getting cheaper. You might consider buying some call spreads, financed by shorting a modestly longer-dated put on the product to alter the risk-return profile of your position.

Wrap Up

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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