The Monday rally on low volume was a bit of a surprise.
No real news except the President and Congressional leaders had a good discussion last week. It was “positive.” I am glad there is no sense of urgency on this spending/taxing issue. If you run the largest government spending regime without a Senate budget why rush? There is no doubt the market is looking to this issue as the main driver. The host of domestic economic news is a slight positive, fiscal cliff aside. The fact the market is shrugging off the France downgrade is promising as well. As of today the market needs a cue for direction but it takes no effort to rally.
VOLATILITY CLUES
Looking at the volatility rout yesterday was more instructive. Traders pulled the plug on the all of the volatility products across the board and the pre-opening activity looks weaker still for these ETF’s and ETN’s. A big reason is the liquidity providers are marking down the near four day weekend taking the S&P 500 implied volatility (SPX IV) and in turn the Volatility Index (VIX) with it. The iPath S&P 500 VIX Short Term Futures (VXX) and ProShares Trust II (UVXY) are caught in the bind as the futures follow the VIX down. That in turn softens up the bids for the volatility products. I would be surprised if they caught a bid at all today.
PRE-HOLIDAY ACTION
Trading into the Thanksgiving holiday is tougher when the volatility is leaking out of the options so fast. I still think this will put pressure on the volatility products like the VXX. Even though the product has come from $37 on Friday it can easily see lower numbers next week.
The VIX Nov futures go away Wednesday leaving the product pricing off the Dec and Jan and more vulnerable to decay.
THE TRADE
Buy a couple out of the money puts in the VXX in the Dec cycle. You can buy puts to sell volatility and it should make for a nice holiday.
Andrew Giovinazzi is holding a position in VXX.
