The shock of the day (actually no shock) is that Spain is considering help from the ECB to get through their fiscal crisis. The market has seen this coming for awhile, and the strength of the Euro this morning is a reflection of the appetite for a TARP-like bailout of the most beleaguered nations in the Euro Zone.
SMALL TAILWIND
This is on the back of ok, but not stellar, earnings reports coming out the US, as the earnings cycle kicks into full gear. The market feels like it has a small tailwind (a 2 to 3 knot breeze) at its back.
MORNING ACTION
As of mid morning Tuesday, the S&P 500 (SPX) is up 10 handles to break the 1450 level for the first time since Tuesday morning. The Volatility Index (VIX) is down around 4% to 14.67, as the volatility searches for the 14 level. More solid earnings and 3/4 point moves will get us there by the end of the week. Realized volatility is coming up a bit but not really jumping off the floor without the rocket fuel effect of stimulus. The market is left to get to where it wants to go in fits and starts. A stabilizing force in the Euro Zone only helps.
IMPLIED VOLS STILL HIGH
For a trade, I am looking for this trend to continue. What we have is a market moving up but short term implied volatility is still a little high. The 10-day realized volatility for the SPDR S&P 500 ETF (SPY) has hovered around 9% for a couple weeks now, and the trend looks to continue.
With the election looming, there is a natural floor under the November implied volatility, since the options in the cycle should cover the election outcome, hanging chads notwithstanding. This set-up fits a time spread the best. The spread I have in mind is buying a just OTM call time spread in the SPY (or SPX) and ride it through the earnings trend this week.
We are not looking for fireworks, just a couple of sparklers this week.
